Key economic metrics surged prior to flooding
Economic Performance and Challenges in Pakistan
Pakistan's economy showed signs of improvement in the first half of 2025, with major economic indicators performing well. However, this progress was later affected by floods that occurred between July and September, which had a negative impact on the overall economic situation.
The government claims that Pakistan's economy is moving towards gradual stabilization, with early gains from implemented structural reforms. Key economic indicators have shown improvement, including better fiscal discipline through stronger revenue mobilization and prudent expenditure management. Higher remittances, an expanding LSM sector, and growing IT exports have further strengthened the economic outlook. Public debt has decreased by over Rs. 1,371 billion, marking the first quarterly reduction in more than five years.
Key Economic Indicators
Main economic indicators have performed well, with GDP growth remaining on a higher trajectory, inflation rates declining, budget deficits and current accounts under control, and foreign exchange reserves and currency exchange remaining stable. The tax to GDP ratio also started increasing. However, the floods in different parts of the country during July to September had a negative impact on the overall economy. The State Bank of Pakistan (SBP) reduced interest rates in 2025.
Despite these improvements, people did not see any relief due to higher energy prices and heavy taxation, which affected both common citizens and the business community. Many industries were forced to close, leading to widespread unemployment. The unemployment rate in Pakistan rose to its highest level in 21 years at 7.1% in the last fiscal year. The highest unemployment was recorded in Khyber Pakhtunkhwa (KP), followed by Punjab, while Sindh had the lowest unemployment rate. According to records, 7.1% was the highest unemployment rate since 2003-04, when it stood at 7.7%. Since then, unemployment has remained between 5.3% and 6.9%. In 2018-19, the unemployment rate was 6.9%. The World Bank report also indicated an increase in poverty levels.
International Recognition and Challenges
International financial institutions and credit agencies have acknowledged Pakistan's economic recovery. The International Monetary Fund (IMF) completed the second review of Pakistan's economic reform program supported by the Extended Fund Facility (EFF) and the first review of the Resilience and Sustainability Facility (RSF). However, the government missed 11 performance indicators under its IMF program during the second review. Floods are expected to reduce the country's GDP growth forecast by 0.5 percent. Pakistan suffered losses of over 1,000 lives and damages of around Rs822 billion (approximately $2.9 billion) due to recent floods that caused widespread destruction of homes, infrastructure, and essential public services.
Economic Growth and Inflation Trends
Pakistan's economy grew by 3.04% in FY25, mainly due to stronger performance in agriculture, industry, and services. The growth rates for agriculture, industry, and services were 1.51%, 5.26%, and 3%, respectively. The annual inflation rate dropped sharply to 4.49% during the fiscal year 2024-25 from 23.41% in the previous year. However, in the second phase of the year, inflation increased to over 6%. For FY26, the government has set an inflation target of 7.5%. Prices of sugar increased after the government allowed its exports, and wheat prices also rose following the floods. On the taxation side, the Federal Board of Revenue (FBR) struggled to meet its tax collection targets despite extensive taxation measures.
Budget Deficit and Current Account Surplus
Pakistan's budget deficit was recorded at Rs6.17 trillion, or 5.4% of GDP, during the fiscal year 2024-25, marking a 9-year low. The primary balance posted a surplus of Rs2.719 trillion, accounting for 2.4% of GDP. Meanwhile, the budget recorded a surplus of Rs2.1 trillion (1.6% of GDP) in the first half of the current fiscal year 2025-26. The current account (C/A) posted a massive surplus of $2.1 billion during FY2024-25, a sharp contrast against the $2.07 billion deficit in FY24. This was the first current account surplus in 14 years. Pakistan received the highest-ever overseas workers' remittances of $38.3 billion in the previous fiscal year.
Trade and Foreign Exchange Reserves
Exports of goods rose by 4.2% to $32.3 billion, while imports increased by 11.1% to $59.1 billion, widening the trade deficit to $26.8 billion from $22.2 billion last year. In the first five months of the current year, goods exports rose by 2.0% to $10.6 billion, while imports increased by 9.6% to $20.7 billion, resulting in a trade deficit of $10.1 billion compared to $8.5 billion last year.
Sectoral Performance and Investment
The LSM sector experienced a decline of 0.74% in the fiscal year 2024-25, but it rebounded in the second phase. Foreign direct investment (FDI) into Pakistan rose by 5% during the last fiscal year (FY25), supported by Chinese inflows. According to the SBP, Pakistan fetched FDI of $2.457 billion during July-June of FY25, compared to $2.347 billion in the same period of FY24. Foreign exchange reserves improved during the year 2025, reaching $21.089 billion on December 12, up from $15.9 billion in December last year. The Pakistani currency remained stable at around Rs280 against the US dollar. The benchmark KSE-100 index of the Pakistan Stock Exchange reached an all-time high of approximately 172,674.66 points in December 2025.
Credit Ratings and Privatization Efforts
All three major global rating agencies (Moody's, Fitch, and S&P Global) have raised Pakistan's credit ratings from low, distressed levels (like 'CCC+' or 'Caa3') to higher categories, such as 'B-' or 'Caa1', with a stable or positive outlook. The government achieved significant success in its privatization program. It made a second attempt for the privatization of Pakistan International Airlines (PIA) after failing in the previous year. The government also privatized the First Women Bank. However, the Utility Stores Corporation (USC) formally closed all its operations across the country during the year.
Debt Reduction and Government Borrowing
Pakistan's total debt stocks, including domestic and external, eased to Rs76.980 trillion by the end of October 2025, down from Rs77.888 trillion in June 2025, depicting a decline of Rs908 billion. The federal government's borrowing from the SBP remained in negative territory during the first five months of the current fiscal year (FY26), reflecting a continued shift away from State Bank financing for budgetary needs. According to statistics released by the SBP, the government retired Rs877.228 billion from July 1 to November 28, 2025, to the SBP, compared with net borrowing of Rs32 billion in the same period last year.
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