Pakistan’s GDP Growth Projected to Rise by Fitch Ratings

Fitch Ratings has released a statement indicating that Pakistan’s real gross domestic product (GDP) growth is expected to increase to 3.5% by 2027, up from 2.5% in 2024.

According to the rating agency, this economic upturn follows a period marked by considerable instability and elevated inflation.

The Consumer Price Index (CPI) inflation has decreased to 4.1% in July 2025, a significant drop from its peak of 38% in May 2023. The agency forecasts that inflation will average around 5% in 2025.

The recent reduction in the policy rate to 11% since May 2024, coupled with a more stable external financial situation demonstrated by decreased currency volatility and current account surpluses, is anticipated to bolster the economic recovery, the statement noted.

Fitch commented that the country’s banking sector is poised to gain from enhanced business opportunities because of better operational circumstances amid diminishing macroeconomic pressures.

This outlook is further supported by Pakistan’s enhanced sovereign credit profile, evidenced by Fitch’s upgrade of Pakistan’s Long-Term Issuer Default Rating (IDR) to ‘B-‘/Stable from ‘CCC+’ in April 2025. This upgrade is attributed to continued economic recovery, ongoing reforms, and improvements in fiscal performance.

Fitch anticipates that the combination of reduced interest rates and an improving macroeconomic landscape will stimulate private credit demand, thereby fostering more consistent loan and deposit growth, and strengthening banks’ financial results.

Sustained fiscal and economic reforms could empower banks to allocate additional credit to the private sector, which reached a cyclical low of 9.7% of GDP in 2024, and lessen banks’ reliance on public-sector lending.

Nonetheless, the agency cautioned that risks remain due to Pakistan’s improving, yet still vulnerable, operating environment and its low sovereign credit rating. The intrinsic creditworthiness of banks will likely remain closely tied to the sovereign and the advancement of economic reform in the near term, considering their substantial holdings of sovereign securities and loan exposures to state-linked entities.

Fitch also highlighted that Pakistani banks have shown resilient financial performance despite the challenging conditions of recent years. The sector’s impaired loan ratio improved to 7.1% by March 2025 from 7.6% at the end of 2023, resulting from strong loan growth of 26% amid high inflation, it added.

The agency expects the rate of further improvement to slow as loan growth moderates, but asset-quality pressures should remain manageable as lower interest rates improve borrowers’ repayment capabilities.

Return on average equity has also normalized to 20% in 1Q25, from approximately 27% in 2023, as net interest margins decreased and operating costs were increased by inflation but were offset by higher non-interest income.

Fitch anticipates continued margin pressure as interest rates adjust, but loan growth and treasury income should support the sector’s earnings.

The system’s capital adequacy ratio continued its upward trend, reaching a decade-high of 21% by March 2025. This reflects robust internal capital generation. The ratio could decrease if higher risk-weighted private-sector credit increases in the overall mix but will remain comfortably above the 11.5% regulatory minimum.

The sector’s funding and liquidity position, along with low balance-sheet leverage, were described as a relative credit strength, enabling banks to withstand volatile funding conditions in 2023 and 2024.

This is attributed to low loan-to-deposit ratios (38% at end-June 2025), customer deposits comprising 65% of total funding, and a low deposit dollarization rate of about 7%. These factors are expected to continue supporting the sector’s growth in the medium term.

Fitch concluded that most large Pakistani banks are well-positioned to navigate the transition to a more normalized operating environment characterized by lower interest rates, despite the persistence of structural challenges.

The rating agency said that banks that can effectively diversify their revenue streams while upholding disciplined credit underwriting are more likely to capitalize on Pakistan’s economic stabilization while mitigating the risks of unforeseen shocks in the system.