Pakistan’s Economy on Recovery Path as Fitch Projects 3.5% Growth by 2027

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ISLAMABAD – Pakistan’s economy is slowly regaining stability after years of inflation and political turbulence, with Fitch Ratings projecting real GDP growth to accelerate from 2.5% in 2024 to 3.5% by 2027. The outlook, Fitch said, reflects easing inflation, a stronger currency, and reforms that are beginning to take hold.

The rating agency noted that Pakistan had endured “significant turmoil and high inflation” but is now emerging from the crisis. Consumer price inflation, which peaked at 38% in May 2023, has eased sharply to 4.1% as of July 2025. Fitch expects inflation to average around 5% in 2025, supported by lower interest rates and fiscal stabilization.

Monetary policy has shifted toward growth, with the central bank halving the policy rate since May 2024 to 11%. Meanwhile, a stabilizing external position, reflected in reduced currency volatility and current account surpluses, is providing greater investor confidence.

According to Fitch, Pakistani banks stand to gain from improving business opportunities as operating conditions normalize. The sector has already shown resilience through difficult years, with the impaired loan ratio falling to 7.1% by March 2025 from 7.6% at the end of 2023. Loan growth of 26% in recent years, despite high inflation, has bolstered balance sheets.

The banking industry’s return on equity has normalized to 20% in the first quarter of 2025, down from an inflation-driven peak of 27% in 2023, as margins tightened. Still, treasury income and loan expansion are expected to support earnings moving forward.

System capital adequacy remains strong, hitting a decade-high of 21% by March 2025, well above regulatory minimums. Liquidity is also robust, with low loan-to-deposit ratios of 38% and minimal deposit dollarization of 7%.

Fitch upgraded Pakistan’s Long-Term Issuer Default Rating in April 2025 to “B-” with a stable outlook, citing reform momentum and stronger fiscal discipline. Moody’s also revised Pakistan’s ratings upward earlier this year.

The agency warned, however, that structural challenges remain. Pakistan’s banks are still heavily exposed to sovereign debt and state-linked entities. Private sector credit, at just 9.7% of GDP in 2024, remains far below regional levels. Fitch said ongoing reforms will be critical to expanding credit access and reducing dependence on government borrowing.

“Banks that can diversify revenue streams while maintaining disciplined credit underwriting are likely to be better placed to benefit from Pakistan’s economic stabilization,” Fitch concluded.

Despite the risks, the outlook signals that Pakistan’s financial system is gradually moving toward stability, offering cautious optimism for sustained growth in the medium term.