ISLAMABAD  -  Fitch Ratings on Monday said that Pakistan’s real GDP growth to accelerate to 3.5 percent by 2027 from 2.5 percent in 2024.

It stated that Pakistan’s economic recovery comes after a period of significant turmoil and high inflation. The rating agency expects the country’s real GDP growth to accelerate to 3.5 percent by 2027 from 2.5 percent in 2024. Consumer price inflation eased to 4.1 percent in July 2025 from its peak of 38 percent in May 2023, and we expect it to average around 5 percent in 2025. The halving of the policy rate since May 2024 to 11 percent and a stabilising external position, evident in lower currency volatility and current account surpluses, should support this recovery. Pakistan’s banks are set to benefit from better opportunities to generate business volumes due to improving operating conditions amid receding macroeconomic headwinds.

The rating agency said that this view is reinforced by Pakistan’s improved sovereign credit profile, as reflected in Fitch’s upgrade of Pakistan’s Long-Term Issuer Default Rating (IDR) to ‘B-’/Stable from ‘CCC+’ in April 2025, underpinned by ongoing economic recovery, reforms and improving fiscal performance.

Fitch expects the combination of lower interest rates and an improving macroeconomic environment to stimulate private credit demand, supporting steadier loan and deposit growth, and banks’ financial performance. Continued fiscal and economic reforms could enable banks to deploy more credit to the private sector, which reached a cyclical low of 9.7 percent of GDP in 2024, and reduce banks’ dependence on public-sector lending.

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.

Pakistani banks have demonstrated resilient financial performance despite challenging conditions in recent years. The sector’s impaired loan ratio improved to 7.1 percent by March 2025 from 7.6 percent at end-2023, driven by strong loan growth of 26 percent amid high 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.

Return on average equity has also normalised to 20 percent in 1Q25, from around 27% in 2023, as net interest margins narrowed and operating costs were driven higher by inflation but offset by higher non-interest income. We expect margin pressure to continue as interest rates adjust, but loan growth and treasury income should support the sector’s 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 percent regulatory minimum.

The sector’s funding and liquidity position and low balance-sheet leverage are a relative credit strength that enabled banks to withstand volatile funding conditions in 2023 and 2024. This stems from low loan-to-deposit ratios (38 percent at end-June 2025), customer deposits making up 65% of total funding, and low deposit dollarisation of about 7 percent. We expect these factors to remain supportive of the sector’s growth in the medium term, it added.