Funding the Future: How Macro Stability is Reshaping Pakistan’s Market

For the first time in years, Pakistan’s economic narrative is moving from crisis management to growth momentum. As the new year begins, investors and businesses alike are witnessing a resurgence of confidence, fueled by stabilized macroeconomic indicators, easing inflation, and renewed interest from international markets.

Foundation of Stability

Pakistan appears to be in a transitional phase: moving away from acute instability, while still struggling to build a durable growth model.

In late 2023 and early 2024, Pakistan faced one of its most severe macroeconomic episodes in decades. Inflation climbed close to 30%, the rupee depreciated sharply, foreign reserves fell to precarious levels, and concerns about external debt servicing became widespread.

By the end of 2025, several of these pressures had eased.

• Headline inflation slowed to about 5.6%.
• The central bank cut the policy rate from a peak of 22% to 10.5%.
• Foreign exchange reserves recovered to roughly USD 21 billion.
• Pakistan’s sovereign credit rating was revised upward to B- with a stable outlook.

These shifts reflect a combination of tighter fiscal discipline, IMF support, import compression, and subdued domestic demand rather than a broad-based economic expansion. The IMF program remained on track through late 2025, including a USD 1.2 billion tranche disbursed in December.

Economists caution that the stabilization is real, but still shallow. In short, the economy has stopped deteriorating, but has not yet solved the problems that caused the deterioration.

Financial Markets Lead the Recovery

Where the recovery is most visible is in financial markets. Pakistan’s equity market became one of Asia’s best performers in 2025. The KSE-100 index crossed 174,000 points, delivering a 49% return in USD terms, with total market capitalization rising to over USD 71 billion.

Investor participation also broadened:

• Total public equity investors exceeded 1.1 million, up more than 30% year-on-year.
• The number of listed companies with market capitalization above USD 1 billion rose from 11 to 18.
• Seven IPOs raised about USD 15.3 million, all heavily oversubscribed, with peak oversubscription of more than 16 times.

While the immediate turnaround is clear, experts caution that sustaining growth will require deepening institutional reforms and long-term policy consistency.

The stock market has risen mainly because interest rates are lower, there is more money in the system, and investors have few other places to put their funds, not because companies have suddenly become much stronger. Profits are up, but much of the rise is a recovery from past weakness.

Mergers, Acquisitions and Privatization

Deal activity also revived, crossing USD 1 billion in disclosed value in 2025, driven mainly by strategic acquisitions and mergers rather than financial engineering

Notable developments included:

• The sale of First Women Bank to a UAE-linked investor, marking a rare completed bank privatization.
• Telecom and industrial consolidation (e.g., PTCL–Telenor, Engro–Deodar).
• Renewed interest from Gulf and regional buyers in energy, chemicals, and manufacturing.

While the transaction volumes remain modest by regional standards, the nature of the deals, long-term strategic control rather than speculative flows, suggests a cautious re-entry of foreign and regional capital.

Privatization progress, however, remains slow. Only a small fraction of state-owned enterprises have moved meaningfully toward restructuring or sale, and politically sensitive sectors such as energy distribution continue to generate fiscal losses.

Startup Fundings: Small but Recovering

Pakistan’s startup sector, badly hit by the global venture slowdown in 2023–24, showed signs of recovery in 2025. Total venture funding exceeded USD 89 million, more than double the previous year, with fintech accounting for the largest share.

Notable features of the rebound:

• Average deal sizes increased to USD 7.4 million.
• Financing structures became more flexible, including convertible notes and debt-equity hybrids.
• Global investors such as ADB Ventures, Tim Draper, and Yango Ventures maintained selective exposure.

Even so, Pakistan remains a very small player in global venture capital, and funding is concentrated in a narrow set of sectors and founders. Regulatory uncertainty, weak exit markets, and currency risk continue to limit larger inflows.

Foreign Economic Ties

Pakistan’s stabilization has also relied heavily on external partnerships. China, Saudi Arabia, and the United States have each played roles through investment commitments, deposits, trade engagement, and energy cooperation. CPEC Phase II is expected to shift focus toward industrial zones, logistics, and exports rather than infrastructure alone.

Saudi Arabia’s announced USD 25 billion in long-term investment commitments and renewed US engagement in minerals and energy have improved sentiment, though much of this remains at the memorandum or early project stage.

External financing remains essential. Pakistan’s current account improved in 2025 partly because imports remained suppressed, not because exports surged. This limits how far the economy can grow without running into external constraints again.

Macroeconomic Overview Table

Indicator	End of 2023 / 2024	End of 2025	Change
Inflation	~30%	5.6%	↓ 24.4 pp
Policy Interest Rate	22%	10.5%	↓ 11.5 pp
FX Reserves	USD 10–12 Bn	USD 21 Bn	↑ ~100%
Sovereign Rating	B- / Negative	B- / Stable	Stable / Improved
IMF Program Disbursement	–	USD 1.2 Bn (Dec ’25)	New tranche

The Underlying Fragilities

Despite the calmer surface, Pakistan’s economic fundamentals remain fragile. Exports are still heavily concentrated in low-value textiles. Energy sector losses persist. Tax compliance remains weak. Productivity growth is low, and public debt absorbs a large share of fiscal resources.

Most importantly, Pakistan’s growth model remains dependent on cycles of external borrowing followed by stabilization, rather than on export-led, productivity-driven expansion. This means that while 2026 begins in a stronger position than recent years, the long-term trajectory is not yet secured.

A Road Ahead

Pakistan is no longer in immediate crisis. That is a real improvement. However, the economy is not yet strong or stable enough to grow on its own. Markets are positive, some foreign investors are returning, and key indicators have improved, but the deeper changes needed for long-term growth are still missing.

This leaves a small window to act: to stop focusing only on emergencies and start building a stronger economy through better institutions, higher exports, energy and tax reform, and a healthier environment for private business.

If this window is used well, 2026 could mark the start of lasting recovery. If not, it may simply be a pause before the next downturn.