By Staff Reporter
KARACHI: Pakistan’s economy is poised for a stronger recovery, with real gross domestic product growth expected to pick up to 3.5% by 2027 from 2.5% in 2024, Fitch Ratings said on Monday, following a period marked by significant turmoil and high inflation.
The rating agency’s projection comes as consumer price index inflation has eased sharply to 4.1% in July 2025 from a peak of 38% in May 2023, with Fitch anticipating an average of around 5% for the full year. The halving of the policy rate since May 2024 to 11%, coupled with a stabilising external position, including reduced currency volatility and current account surpluses, should bolster the rebound, according to a statement from the agency.
“Pakistan’s banks are set to benefit from better opportunities to generate business volumes due to improving operating conditions amid receding macroeconomic headwinds,” Fitch said.
This optimism is bolstered by Pakistan’s enhanced sovereign credit profile, highlighted by Fitch’s upgrade of the country’s Long-Term Issuer Default Rating to ‘B-’ with a stable outlook from ‘CCC+’ in April 2025. The move was driven by ongoing economic recovery, reforms and improving fiscal performance.
The outlook aligns with a separate positive development from Moody’s, which upgraded Pakistan’s ratings to Caa1 and changed the outlook to stable.
Fitch anticipates that lower interest rates and a brighter macroeconomic backdrop will spur private credit demand, leading to more consistent loan and deposit growth while enhancing banks’ overall financial results.
“Continued fiscal and economic reforms could enable banks to deploy more credit to the private sector, which reached a cyclical low of 9.7% of GDP in 2024, and reduce banks’ dependence on public-sector lending,” the statement said.
“Nevertheless, there are risks associated with Pakistan’s improving, albeit still weak, operating environment and its low sovereign credit rating. The banks’ intrinsic creditworthiness will likely remain closely linked to the sovereign and the pace of economic reform in the near term given their significant holdings of sovereign securities and loan exposures to state-linked entities.”
Despite recent hardships, Pakistani banks have shown resilience in their financial performance. The sector’s impaired loan ratio fell to 7.1% by March 2025 from 7.6% at the end of 2023, fueled by robust loan growth of 26% amid elevated inflation.
“We expect the pace of further improvement to slow as loan growth decelerates, but asset-quality pressures should remain manageable as lower interest rates enhance borrowers’ repayment capacity,” Fitch said.
Return on average equity has settled at 20% in the first quarter of 2025, down from about 27% in 2023, as net interest margins contracted and inflation pushed up operating costs, though these were partly mitigated by increased non-interest income.
Fitch foresees ongoing margin compression as rates normalise, but expects loan expansion and treasury income to underpin earnings.
“The system capital adequacy ratio continued to increase, to a decade-high of 21% by March 2025, reflecting sound internal capital generation. The ratio could moderate if higher risk-weighted private-sector credit increases in the overall mix but will remain well above the 11.5% regulatory minimum,” the agency noted.
The banking sector’s funding and liquidity stance, along with modest balance-sheet leverage, represents a key strength that helped it endure funding volatility in 2023 and 2024. This is underpinned by low loan-to-deposit ratios of 38% at the end of June 2025, customer deposits comprising 65% of total funding, and deposit dollarization at roughly 7%. Fitch expects these elements to continue aiding medium-term growth.
Most major Pakistani banks are equipped to handle the shift to a more typical environment of reduced interest rates, though longstanding structural issues remain, the agency said.
“Banks that can diversify revenue streams while maintaining disciplined credit underwriting are likely to be better placed to benefit from Pakistan’s economic stabilisation while guarding against the risks of unforeseen shocks in the system,” Fitch said.
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