Mubashar Nadeem
The State Bank of Pakistan (SBP) has underscored the urgent need for sustained structural reforms to ensure long-term economic growth, build foreign exchange buffers, and reduce the country’s external financing vulnerabilities. The remarks come as part of the SBP’s latest Financial Stability Review (FSR), its flagship annual publication, which outlines both achievements and potential risks facing the Pakistani economy.
According to the SBP, Pakistan’s short-term financial outlook appears stable, but the global environment and lingering macroeconomic uncertainties continue to pose risks. Rising protectionism and uncertain global economic conditions could challenge the country’s fragile recovery.
Despite external pressures, the SBP maintains that Pakistan’s banking sector remains strong and resilient, even under simulated stress scenarios. Results from the central bank’s stress tests indicate that the financial system would remain compliant with minimum capital requirements, even under severe yet plausible economic shocks over the next three years.
“Financial system resilience is intact, but ongoing vigilance and proactive regulatory measures are essential,” the SBP stated, adding that it will continue to strengthen its supervisory framework to address emerging risks, particularly in technology and cybersecurity.
One of the more notable economic developments highlighted in the review is the sharp decline in inflation. Pakistan’s national Consumer Price Index (CPI) dropped to 7.2% in March 2025, down from a staggering 28.7% a year earlier. This dramatic improvement enabled the Monetary Policy Committee to slash the policy rate by 1,000 basis points to 12.0% in January 2025, marking a significant shift toward easing financial conditions and encouraging private sector lending.
Lower interest rates, alongside a more stable exchange rate and stronger external account position, have improved market confidence. The SBP also noted that this has enhanced the repayment capacity of borrowers and is expected to support higher private sector credit growth in the coming months.
The continuity of Pakistan’s engagement with the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) is seen as a stabilizing factor. The first review of the IMF program, completed in March 2025, found that implementation remained strong—sending a positive signal to global markets.
As a result, SBP’s foreign exchange reserves rose by 41.4%, reaching $11.2 billion in February 2025. This has helped anchor the rupee-dollar exchange rate, contributing to improved investor sentiment and easing financial pressures.
The report also noted that fiscal consolidation efforts are on track, further supporting the macroeconomic outlook. Encouragingly, the Business Confidence Index has remained positive since August 2024, while the SBP’s Systemic Risk Survey suggests improving perceptions of macroeconomic stability over the next six months.
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These developments point to a cautiously optimistic view of the economy, provided that structural reforms are not delayed. The SBP emphasized that real progress on economic reforms—not just cosmetic changes—will be necessary to build long-term resilience.
In a rapidly digitalizing financial landscape, cybersecurity has emerged as a major risk, according to the FSR. The SBP is responding by establishing a dedicated Cyber Risk Management Department to conduct on-site and off-site supervision of cybersecurity preparedness among regulated entities.
The central bank’s Vision 2023–2028 puts heavy emphasis on technological innovation, cybersecurity, and data privacy, recognizing that digital stability is now essential for financial stability.
While falling global commodity prices and rate cuts by central banks in advanced economies (excluding the U.S. Federal Reserve) offer some relief, geopolitical tensions and shifting trade policies—particularly from the U.S.—could disrupt the global financial environment and have ripple effects on Pakistan.
The SBP warned that changes in U.S. trade policy could impact the Federal Reserve’s monetary policy decisions, indirectly influencing global liquidity, investor flows, and financing costs for emerging markets like Pakistan.
Pakistan has made notable progress in stabilizing its economy, with inflation dropping and foreign reserves climbing. However, the SBP makes it clear: without deep-rooted structural reforms, these gains may prove short-lived. Continued commitment to fiscal responsibility, regulatory upgrades, and digital security will be essential to turning short-term recovery into sustained, inclusive economic growth.
