Pakistan is expected to sustain its economic performance in the medium term as manufacturing recovers and investment increases, but the country faces “significant” risks due to global economic uncertainty, the Asian Development Bank (ADB) said on Friday.
Pakistan’s economy recovered as growth strengthened and inflation declined in fiscal year (FY) 2025, which ended on June 30, supported by tight macroeconomic policies and progress in economic reforms. The country’s real gross domestic product (GDP) growth is forecast to be 3.5 percent in FY2026 and 4.5 percent in FY2027, from 3.1 percent in FY2025.
However, prolonged Middle East war between the United States (US), Israel and Iran could weigh significantly on Pakistan’s economic outlook by slowing growth through higher energy and fertilizer costs, weakening agricultural and industrial output, reducing remittances, and widening the current account deficit.
ADB said Pakistan’s economic outlook faces significant downside risks from global economic uncertainty despite recent stabilization, leading to elevated inflationary, fiscal, and external account pressures.
“Addressing these challenges requires prudent macroeconomic policies and steadfast implementation of structural reforms,” the Bank said in its country outlook report issued on Friday. “Adherence to the economic adjustment program is therefore critical to strengthening resilience and enabling sustainable and inclusive growth.”
Average inflation is projected to rise to 6.4 percent in FY2026 and 6.5 percent in FY2027 due to surging oil prices and disrupted trade routes amid the Middle East conflict as oil and gas constitute a large share of Pakistan’s imports. The central bank is expected to ease monetary policy cautiously to stabilize inflation within its medium-term target range of 5 percent-7 percent, according to the report.
In FY2026, growth will be supported by a rebound in private-sector investment, driven by the recent progress on reform measures and a stable foreign exchange market. The effective implementation of the reform program is expected to foster a more stable macroeconomic environment and gradually remove structural barriers to growth. Economic activity in both industry and services will benefit from monetary easing, while construction activity will be backed by fiscal incentives introduced in the FY2026 budget, alongside post-flood reconstruction efforts.
“Sustained reform efforts are critical to preserve the growth momentum and bolster fiscal and external buffers against global shocks,” ADB quoted its Pakistan country director Emma Fan as saying.