Pakistan’s Economy Expands 2.68% in FY25 Amid Improving Inflation and Fiscal Outlook

Key Highlights:

Pakistan’s real GDP grew by 2.68% in FY25
Inflation eased to 3.5% YoY in May 2025, expected to stay between 3–4% in June
LSM contracted 1.5% during Jul–Apr FY25, but April showed YoY growth of 2.3%
Fitch upgrades Pakistan’s credit rating, citing macroeconomic stability
Primary fiscal surplus rose to 3.2% of GDP, while fiscal deficit dropped to 3.2%
Remittances up 28.8% YoY to $34.9B, led by KSA and UAE inflows
KSE-100 closed May 2025 at 119,691 points, gaining 8,365 points in a month

Macroeconomic Snapshot: GDP Growth and Inflation

Pakistan’s real GDP expanded by 2.68% during fiscal year 2025, according to the Finance Division’s Monthly Economic Update for June 2025. Inflation continued to cool down, with May CPI at 3.5% YoY, and June inflation expected to remain between 3–4%, a significant drop from 11.8% in May 2024.

Industrial Activity: LSM Shows Mixed Trends

Large-Scale Manufacturing (LSM) contracted by 1.5% in the Jul–Apr FY25 period, compared to 0.3% growth in the same period last year. April 2025 recorded a 2.3% YoY rise, but a 3.2% MoM decline, reflecting volatility. However, trends in cement dispatches and auto sales suggest a positive LSM outlook for the coming months.

External Sector & IMF Engagement

Pakistan posted a current account surplus of $1.81B, reversing a $1.6B deficit last year. The surplus is supported by:

Remittances surging 28.8% YoY to $34.9B
Goods exports rising 4% to $29.7B
IT exports up 18.7% to $3.5B
Service exports growing 8.5% to $7.6B

Imports rose by 11.5% to $54.1B, widening the trade deficit, but external buffers remain strong, with FX reserves at $17B (SBP holds $11.7B as of June 13).

Ongoing IMF programs (EFF and RSF) continue to strengthen investor confidence. Fitch Ratings upgraded Pakistan, acknowledging improvements in fiscal management and external stability.

Public Finances: Revenue, Deficit, and Spending

Net federal revenue rose 44.4% YoY to Rs 8,124.2B
Tax revenue increased 25.9% YoY to Rs 10,233.9B
- FED: ↑ 33.8%
- Direct tax: ↑ 27.0%
- Sales tax: ↑ 26.5%
- Customs: ↑ 16.3%
Non-tax revenue grew by 68.1%
Total expenditures hit Rs 12,948.3B (↑ 18.5% YoY)
- PSDP spending surged 40.6%
- Current expenditure rose 17.8%

The fiscal deficit dropped to 3.2% of GDP, while primary surplus rose to Rs 3,648.9B (up from Rs 1,611.5B last year).

Monetary Policy & Credit Conditions

The SBP kept the policy rate unchanged at 11% in June 2025, citing external risks and inflation uncertainty. For FY26, inflation is projected to remain within the 5–7% range.

Broad money (M2) expanded 6.3% in Jul–May FY25, driven by a sharp increase in Net Foreign Assets, while Net Domestic Assets grew moderately. Private sector credit more than doubled YoY to Rs 831.8B, signaling rising business activity.

Capital Markets & Investment Flows

KSE-100 Index jumped by 8,365 points in May, ending at 119,691
Market capitalization reached Rs 14,503B
Net FDI stood at $2.0B
- Financial sector: $628.9M
- Power: $562.8M
- Oil & gas: $265.6M
Portfolio outflows: $312.5M (private), $311.9M (public)

BISP disbursement rose 29% YoY to Rs 411.6B
Agricultural credit reached Rs 2,066.6B (↑ 15.7%), heading toward the Rs 2,572.3B target
PPAF issued 18,525 interest-free loans worth Rs 894M in May
Overseas worker registrations rose 12.7% MoM to 59,995 in May

Outlook

The Finance Division forecasts continued momentum in economic growth for FY26, supported by:
✅ Fiscal consolidation
✅ Improved investor confidence
✅ External sector strength
✅ Low inflation
✅ Robust remittance inflows

However, challenges remain in sustaining LSM growth and narrowing the trade gap. The government’s commitment to privatization, energy reforms, tax harmonization, and climate action is expected to lay a strong foundation for sustainable and inclusive growth.

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Yasher Rizwan