SBP Warns Floods Could Challenge Pakistan’s Economic Recovery

The State Bank of Pakistan (SBP) has highlighted that while subdued inflation, a relatively stable exchange rate, prudent fiscal policies, and an improved credit rating are supporting Pakistan’s economic recovery, recent torrential rains and flooding may pose challenges to growth. The warning comes in SBP’s report, “Mid-Year Performance Review of the Banking Sector.”

The report notes that the banking sector remained profitable despite a decline in interest rates, with after-tax profits rising by 27.1% in H1CY25 compared to just 1.1% in H1CY24. The sector’s asset base expanded by 11% to reach PKR 59,572 billion, driven primarily by increased investments, while advances contracted slightly due to seasonal factors.

Although heavy floods could affect the repayment capacity of agricultural borrowers, the SBP emphasized that the banking sector’s stability is likely to remain intact because agricultural loans make up a relatively small share of total advances and banks hold adequate capital buffers. Textile exports, benefiting from a lower tariff rate of 19% to the US, may boost credit demand, while fiscal consolidation and planned official inflows could help ease pressure on government borrowing needs.

The SBP expects the banking sector to maintain steady performance in the second half of 2025, with growth in lending likely to offset lower interest rates. Macro stress tests indicate that banks, particularly large systemically important institutions, are resilient to severe economic shocks. Meanwhile, deposits grew by 17.7%, reducing reliance on borrowings, and financial market volatility remained contained despite equity market fluctuations and external geopolitical factors.

Key Banking Sector Figures  H1CY25

SBP officials noted that despite seasonal and environmental challenges, improved business confidence, easing financial conditions, and a recovering economy are expected to support lending and overall sector stability in the remainder of 2025.