Economic Challenges Facing Pakistan: Insights from the State Bank of Pakistan’s Annual Report 2024-25

In a comprehensive analysis of the current economic landscape, the State Bank of Pakistan (SBP) has identified a series of pressing challenges that hinder sustainable growth. According to the Annual Report on the State of the Economy 2024-25, persistent fiscal imbalances, low domestic savings, weak productivity, and climate-related shocks continue to undermine economic stability and progress.

Projected GDP Growth and Inflation Rates

The SBP forecasts a GDP growth rate of 3.25-4.25% for FY26, placing it near the lower end of expectations. At the same time, inflation is anticipated to remain between 5-7%. The current account deficit is projected at a manageable 0-1% of GDP, suggesting some stability in the external sector. However, the SBP warns that numerous factors, including flood-induced agricultural losses, the high cost of energy, and global trade uncertainties, could jeopardize these gains.

Impact of Recent Floods on Agriculture

Recent floods have devastated agricultural regions in Punjab and Khyber-Pakhtunkhwa, affecting vital kharif crops such as rice, cotton, maize, and sugarcane. The SBP cautions that the resulting supply chain disruptions may lead to inflationary pressures, further straining the availability of raw materials for agro-based industries. The potential increase in reconstruction spending, while supporting growth, could exacerbate the already constrained fiscal space due to significant debt repayments.

Low Domestic Savings: A Major Economic Weakness

One of the most alarming insights in the SBP report is the persistent issue of low domestic savings. Over the last two decades, gross domestic savings in Pakistan have plummeted to among the lowest levels compared to similar economies. The SBP attributes this decline to several interrelated factors, including:

• Low per capita income
• High inflation
• Fiscal imbalances
• Weak financial intermediation

The Consumption-Driven Economy

Pakistan’s reliance on consumption, which accounts for approximately 92% of GDP, leaves little room for productive investment. This consumption-driven model has been mainly sustained through foreign borrowing and remittances, leading to intermittent growth spurts but failing to establish a long-term foundation for economic expansion. The report notes, “Pakistan’s economy remains predominantly consumption-oriented, with potential GDP growth declining steadily over the last two decades.”

Fiscal Deficits and Debt Spiral

The savings-investment gap, combined with chronic fiscal deficits, has created a debt spiral where revenues barely meet current expenditures. Notably, interest payments consistently exceed development spending, constraining resources for vital sectors such as health, education, and infrastructure. Inefficiencies in public sectors, particularly within state-owned enterprises, further burden the national exchequer, draining funds that could be used for productive investment.

Shortcomings in Financial Intermediation

The SBP report highlights significant weaknesses in Pakistan’s financial intermediation system. The banking sector, heavily reliant on government borrowing and facing low deposit mobilization, struggles to channel savings into private investments. Moreover, the Pakistan Stock Exchange remains dominated by a few large brokerage houses, thereby reducing investor confidence and market participation.

Exclusion from the Formal Financial System

A considerable segment of the population remains excluded from formal financial systems. Many resort to informal savings through mediums such as gold, real estate, livestock, and rotating savings committees (ROSCAs), often due to religious concerns about interest-based banking and low financial literacy. A staggering 35% of respondents in the SBP’s 2025 survey prefer informal channels over formal savings options.

Consequently, Pakistan’s financial depth, gauged through metrics like private sector credit and deposit-to-GDP ratios, lags significantly behind regional competitors including Malaysia, Turkey, and Bangladesh. The SBP warns that without fostering greater financial inclusion and enhancing capital market development, domestic savings will remain insufficient for sustaining economic growth.

Vulnerabilities Beyond Financial and Fiscal Sectors

The report emphasizes that Pakistan’s structural vulnerabilities extend beyond its fiscal and financial realms. It calls for enhancing industrial capacity through investments in sectors such as petrochemicals, mining, and renewable energy. The prolonged dependence on imported industrial inputs and fossil fuels continues to expose the country to external shocks and currency volatility.

Agricultural Productivity Challenges

Agricultural productivity in Pakistan suffers from outdated irrigation systems and climate-induced disasters. Improvement in water management, the establishment of small and medium-sized dams, and investment in climate-resilient crop varieties are essential to mitigate food insecurity and reduce flood risks.

Trade Competitiveness and Regulatory Barriers

Pakistan’s trade competitiveness is hampered by non-tariff barriers, a lack of product diversification, and an overreliance on low-value textile exports. While recent reforms aimed at reducing anti-export bias are commendable, the SBP urges policymakers to implement broader regulatory and logistical reforms to attract foreign investment and integrate local industries into global value chains.

The Role of Human Capital Development

The report correlates Pakistan’s economic stagnation with deeper social and demographic challenges. Nearly 65% of the population is below the age of 30, resulting in high youth dependency and limited job creation, which puts immense pressure on consumption and public spending. With an estimated 44% of the population living in poverty and underinvestment in education and health, productivity and savings capacity remain severely undermined.

The SBP argues that developing human capital must emerge as a national priority. To avoid lagging behind regional competitors that have transitioned toward knowledge-based economies, Pakistan must invest in vocational training, technology, and innovation.

In summary, the SBP’s findings underscore the multi-faceted challenges facing Pakistan’s economy, necessitating a coordinated approach to enhance savings, diversify industries, improve financial inclusion, and invest in human capital for a robust economic future.