2025 Recap

January 01, 2026 (MLN): 2025 unfolded as a year of quiet recalibration rather than dramatic headlines for Pakistan.

Against a backdrop of global uncertainty and lingering domestic pressures, the country spent much of the year restoring balance, steadying its economy, reworking institutions, and re-engaging with key international partners.

 The story of the year was not one of rapid acceleration, but of control gradually being regained through policy discipline and external coordination.

From an economic standpoint, 2025 delivered measurable improvement across key macro indicators.

At its December meeting, the Monetary Policy Committee (MPC) of the State Bank of Pakistan lowered the policy rate by 50 basis points to 10.5%, marking a resumption of easing after a six-month pause.

The previous rate cut had been delivered in May 2025, following an aggressive 1,100bps cumulative reduction between June 2024 and May 2025.

With this latest move, the SBP extended the easing cycle, signaling a gradual normalization of monetary conditions after a prolonged period of tight policy.

The central bank’s dovish stance was underpinned by subdued global oil prices, improving inflation dynamics, and a relatively stable external account.

Headline inflation continued its downward trajectory, easing to 5.61% in December 2025 from 6.15% in November, largely driven by a decline in perishable food prices.

On a calendar-year basis, average inflation for CY25 stood at 3.5%, the lowest annual average recorded since the current CPI series was introduced in 2016, that reinforced the SBP’s confidence in maintaining a cautiously accommodative policy stance.

The current account deficit remained below its historical average, reflecting disciplined import management and robust inflows. In November 2025, Pakistan has recorded a current account surplus of $100 million.

The foreign exchange reserves held by the State Bank of Pakistan (SBP) increased to $15.9 billion during the week ended December 19, 2025.

These gains were largely driven by coordinated fiscal and monetary policies that remained aligned with IMF stabilisation measures, restoring a degree of predictability to Pakistan’s macro framework.

Despite heightened global uncertainty, Pakistan’s economic performance remained relatively insulated from external shocks.

Not to forget that the local unit remained largely stable throughout the year, closing the year at 280.1231 against the US dollar compared with last year’s close of 278.55 per USD.

The year was marked by geopolitical stress, including the Iran–Israel conflict, renewed border tensions with India and Afghanistan, and shifting global trade dynamics.

However, improved foreign diplomacy, particularly with key Western and Middle Eastern partners, helped Pakistan absorb these pressures.

A major structural development in 2025 was the resolution of over Rs1 trillion in power sector circular debt, one of the most significant reforms undertaken in recent years.

This move was aimed at easing systemic stress in the energy sector and improving liquidity across the value chain.

Pakistan State Oil Company Limited (PSO) is positioned to be the primary beneficiary of Pakistan's landmark Rs1.225 trillion power circular debt resolution agreement.

It is estimated that PSO could see an impact of approximately Rs100 per share on a conservative basis, marking one of the most significant financial breakthroughs for the oil marketing giant in recent years.

On the external financing front, Pakistan made steady progress under the IMF programme during 2025.

 The country secured $3.1 billion under the ongoing US$7 billion Extended Fund Facility (EFF), with $3.9 billion still pending and linked to performance-based biannual reviews.

 In December 2025, Pakistan received $1 billion under the EFF and $200 million under the Resilience and Sustainability Facility (RSF).

In the continuation, the Fund has added new structural conditions to Pakistan’s $7 billion Extended Fund Facility, taking the total to 64 conditions in just 18 months.

The lender pushed Islamabad to confront governance failures, curb corruption vulnerabilities, cut SOE losses, and fix deep distortions in key commodity markets, especially sugar and wheat.

The new conditions, detailed in the IMF’s staff-level report for the second review, indicate the Fund’s heightened focus on institutional reforms, improved transparency, and stronger private sector participation.

Further, the Fund highlighted Pakistan’s “appropriately tight” monetary policy stance and proactive financial sector measures as key factors in maintaining macroeconomic stability amid recent flood-related challenges.

In November, the Fund issued Technical Assistance report on “Governance and Corruption Diagnostic Assessment” wherein it highlighted both regulatory achievements and vulnerabilities that could undermine financial stability, particularly as Pakistan embarks on a sweeping transition to an Islamic banking system by 2028.

The IMF assessment mentioned that while the SBP has a generally strong legal and supervisory framework aligned with Basel Core Principles (BCPs), weaknesses in governance, accountability, and institutional independence could expose the sector to corruption risks.

Fiscal discipline remained a defining feature of the year. For FY26, the government set a primary surplus target of 1.6% of GDP, with revenues projected at 16.3% of GDP and expenditures at 20.2% of GDP.

Early data from 1QFY26 indicated a strong start as Pakistan recorded quarterly primary surplus of Rs3.5 trillion while the overall budget surplus stood at Rs2.1tr, equivalent to 1.6% of GDP, slightly lower than the 1.7% recorded in the same period last year.

This performance was attributed to improved fiscal management- controlled development spending and higher non-tax receipts, particularly from the SBP.

During the first five months of FY26, total remittances reached $16.15bn, up from $14.77bn in the same period last year, showing a 9.33% YoY increase.

Alongside economic consolidation, Pakistan’s political landscape in 2025 underwent notable institutional recalibration.

Governance reforms and constitutional amendments reshaped the balance of authority among key state institutions, while fiscal federalism emerged as a central policy theme.

These changes aimed to create a more coordinated framework for federal–provincial interaction, particularly at a time when fiscal discipline and reform continuity were critical.

A key political milestone was the passage of the 27th Constitutional Amendment in November, which introduced significant legal and administrative changes, including revisions under Article 248..

Geopolitical developments during 2025 also shaped Pakistan’s political and economic environment.

In April, the US announced its “Liberation Day” tariff policy, imposing a 29% tariff on Pakistani exports under a broader framework of reciprocal duties.

Tensions escalated briefly in May, when a four-day India–Pakistan conflict brought the region close to a wider confrontation before a ceasefire was achieved through diplomatic intervention.

That same month, the IMF approved $1 billion under the EFF and $1.4 billion under the RSF, reinforcing Pakistan’s external financing position.

Diplomatic momentum improved in the second half of the year.

In August, US–Pakistan talks resulted in a reduced tariff rate of 19% on Pakistani exports, placing Pakistan among the lowest-tariffed countries in the region.

In September, Pakistan and Saudi Arabia signed a Strategic Mutual Defence Agreement, deepening security cooperation.

October saw Pakistan and the IMF reach a Staff-Level Agreement on the second EFF review and first RSF review, while border tensions with Afghanistan were defused through diplomacy..

Pakistan’s foreign policy during 2025 remained anchored in strategic partnerships. China continued to be the cornerstone of Pakistan’s external engagement, with CPEC Phase II gaining traction.

 The second phase prioritised industrial zones and green energy, with over $5 billion in new commitments for special economic zones reported during the year.

Pakistan also explored deeper financial integration with China, including preparations for its first Panda bond.

Relations with the United States showed signs of a pragmatic reset.

The US remained Pakistan’s largest export destination, with exports reaching $2.64bn in 5MFY26 as against the total exports worth $2.51bn in 5MFY25.

Cooperation expanded into energy and critical minerals, highlighted by a $500 million MoU in the rare-earth mining sector.

Pakistan’s participation in humanitarian efforts under the ISF framework in Gaza further contributed to improved diplomatic engagement.

Ties with Saudi Arabia strengthened significantly during the year. Beyond defence cooperation, Saudi Arabia reaffirmed $25 billion in investment commitments across energy, mining, and allied sectors.

Saudi Arabia remained the largest contributor to workers' remittances in November 2025. Inflows from the Kingdom amounted to $753.0 million, although this represented a decline of 10.11% month-on-month. However, on a yearly basis, inflows from Saudi Arabia grew by 3.26%.

Also, the Saudi Fund for Development (SFD), representing the Kingdom of Saudi Arabia, extended the term of a $3 billion deposit with the SBP for an additional year.

The deposit, originally set to mature on December 8, 2025, was placed on behalf of the Islamic Republic of Pakistan.

Not to forget, one of the major highlights of the final month of this turbulent and defining year, marked by economic stabilisation and war, was the privatization of the national carrier, PIA.

After nearly two decades of stalled reforms and failed divestment attempts, Pakistan’s long-delayed privatisation agenda appears to have found its footing.

A consortium led by Arif Habib Corporation Limited (AHCL) has emerged as the Highest Ranked Bidder for Pakistan International Airlines Corporation Limited (PIACL) with a Rs135 billion offer for a 75% equity stake.

According to the set terms of this transaction, 7.5% (Rs10.125 billion) of the bid amount will be received by the Government of Pakistan through PIAHCL.

The remaining 92.5% (Rs124.875 billion) will be invested in PIACL in the form of new equity via a Rights Issue in two tranches: two-thirds as an upfront payment (Rs83.25 billion) and one-third as the second tranche (Rs41.625 billion), to be invested within 12 months of Financial Close.

Pakistan Equities:

The scale of positive domestic developments far outweighed the impact of wars and lingering uncertainties, allowing Pakistan’s equity market to deliver an exceptional performance in 2025.

The KSE-100 Index surged 51% during 2025, taking two-year cumulative returns to 179%.

While the broader trend remained upward, the market did experience episodic volatility.

The Pakistan–India conflict in May 2025 triggered a 5.6% decline over three sessions; however, losses were swiftly recovered in a single trading day following successful diplomatic mediation by US President Donald Trump.

Additional volatility stemmed from the Iran–Israel conflict and US-imposed tariffs on global economies, including Pakistan.

In terms of asset class performance, equities emerged as the second-best performing major investment avenue in 2025, trailing only gold, which delivered a return of 73%.

Capital market activity also remained healthy, with seven new offerings during the year, including two GEM Board listings and one migration, indicating renewed confidence in Pakistan’s equity capital markets.

Outlook 2026:

Looking ahead, Pakistan’s equity market is entering 2026 from a position of strength, transitioning from an exceptional rally to a phase characterised by stability, improved market depth, and sustainable growth.

Major brokerage houses continue to maintain a bullish stance on equities, underpinned by further monetary easing expectations, earnings growth visibility, improved macroeconomic discipline and structural reforms and privatisation momentum.

KSE-100 Index targets for December 2026:

Bottom Line

After a blockbuster 2025, the equity market is set to shift gears rather than hit the brakes in 2026, with growth expected to be steadier and more sustainable.

Consensus estimates point to the KSE-100 crossing 214,000 by December 2026, backed by earnings strength, reasonable valuations, and macro stability.

Challenges remain, but Pakistan is no longer stuck in firefighting mode. By the close of 2025, the country had begun laying a steadier, more credible foundation, one that allows it to turn the page with greater control, confidence, and purpose as it moves beyond the year.

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