Islamabad (TDI): State Bank of Pakistan has warned that ongoing tensions in the Middle East could pose downside risks to Pakistan’s financial stability, potentially impacting inflation, external balances, and economic growth.
In its Financial Stability Review (FSR) 2025, the central bank said that although recent macroeconomic stability offers a positive outlook, prolonged uncertainty linked to the regional conflict may reverse these gains, The News reported.
“A protracted and widespread conflict may keep oil prices elevated for a longer period and disrupt global supply chains,” the SBP noted, warning that such developments could reignite inflationary pressures and strain the country’s external account, ultimately slowing growth momentum.
The bank added that its latest Systemic Risk Survey, conducted in January 2026, identified geopolitical tensions as the most significant near-term risk. Experts also cautioned that these risks could spill over into Pakistan’s banking and financial sectors.
Despite these concerns, the SBP maintained that the banking sector remains resilient and capable of absorbing shocks, supported by strong capital buffers and effective regulatory frameworks. Stress tests suggest that major banks are well-positioned to withstand even severe economic disruptions over the next three years.
According to the report, Pakistan’s financial sector expanded by 15.1% in 2025, maintaining both operational and financial stability. Financial depth improved, with the assets-to-GDP ratio rising to 67.1%, while overall risks to financial stability eased during the year.
Read More: Brent Holds Near $114 as Middle East Tensions Persist
The banking sector showed steady performance, with balance sheets growing by 17.8%, largely driven by investments in government securities. Although advances declined year-on-year due to a high base effect from earlier policies, underlying growth remained consistent with improving macroeconomic conditions.
Deposit mobilisation also strengthened, reducing reliance on borrowings. Asset quality improved slightly, with the non-performing loans ratio falling to 6.1% from 6.3% a year earlier. Provisioning coverage rose to 107.7%, keeping overall credit risk contained.
Profitability remained positive, though indicators moderated due to volume-driven earnings. Meanwhile, the sector’s capital adequacy ratio increased to 20.8%, staying comfortably above regulatory requirements.
Islamic banking continued to expand rapidly, with growth in branch networks and strong capital buffers. Microfinance banks, while still under pressure, recorded a notable reduction in losses as restructuring efforts began to take effect.
Read More: US Approves $8.6bn Arms Sales for Middle East Allies
The report added that the non-bank financial sector showed mixed trends, with development finance institutions contracting while other financial institutions grew steadily. The insurance sector maintained solid performance.
The SBP also noted improvements in the non-financial corporate sector’s debt servicing capacity, supported by lower financing costs amid a more accommodative monetary policy, although revenue pressures persisted.
