Pakistan economy growth To Rises to 3.5%: ADB

Pakistan’s economy is set to grow steadily through FY2027, supported by reforms, easing inflation, and improving investment conditions, though external risks remain elevated.

Pakistan’s economy showed signs of recovery in fiscal year 2025 as growth strengthened and inflation declined, according to the Asian Development Bank’s latest Asian Development Outlook released on Thursday. The report said real gross domestic product expanded 3.1% in FY2025, reflecting stabilization after a prolonged period of macroeconomic stress.

Read More: Pakistan’s GDP grows 3.7% in 1QFY26

The Asian Development Bank projected GDP growth to rise further to 3.5% in FY2026 and 4.5% in FY2027. The improvement is expected as manufacturing activity recovers and private investment gradually increases. The report highlighted that tight macroeconomic policies and progress on structural reforms helped restore confidence during FY2025.

ADB Country Director Emma Fan said Pakistan’s economy has stabilized and started gaining stronger momentum. She noted that reform implementation remained critical despite an increasingly uncertain global economic environment. She warned that downside risks persist and could undermine recent gains if reforms lose pace.

Pakistan faced significant economic challenges over the past three years, including high inflation, depleted foreign exchange reserves, and fiscal imbalances. According to the State Bank of Pakistan’s annual report for 2025, inflation averaged above 20% in FY2023 before declining sharply due to monetary tightening and improved supply conditions. The central bank maintained a restrictive policy stance to anchor inflation expectations and stabilize the currency.

The ADB report projected average inflation to rise moderately to 6.4% in FY2026 and 6.5% in FY2027. The increase is attributed to higher global oil prices and disruptions in trade routes linked to tensions in the Middle East. Pakistan remains heavily dependent on imported energy, with oil and gas accounting for a large share of total imports, according to data from the Pakistan Bureau of Statistics.

The State Bank is expected to ease monetary policy cautiously as inflation stabilizes within its medium-term target range of 5% to 7%. Analysts say gradual rate cuts could support credit growth and private sector investment without triggering renewed inflationary pressures. The Monetary Policy Committee has already signaled a data-driven approach to future easing cycles.

Economic growth in FY2026 is expected to be supported by a rebound in private sector investment. This recovery follows recent progress in exchange rate stability and improved external account management. Pakistan’s current account deficit narrowed significantly in FY2025, helped by import compression and steady remittance inflows, according to central bank data.

The industrial sector is likely to benefit from lower borrowing costs and improved energy availability. Large-scale manufacturing, which contracted during earlier crises, has begun to recover gradually. The Pakistan Bureau of Statistics reported modest growth in industrial output during the latter half of FY2025, indicating early signs of recovery.

The services sector is also expected to expand as economic activity normalizes. Banking, telecommunications, and retail segments have shown resilience despite macroeconomic challenges. Increased digitalization and financial inclusion initiatives have further supported service sector growth in recent years.

Construction activity is projected to gain momentum due to fiscal incentives introduced in the FY2026 budget. Government-backed housing schemes and infrastructure spending are expected to stimulate demand in allied industries. Post-flood reconstruction efforts following the devastating 2022 floods are also contributing to increased construction activity.

Pakistan’s agricultural sector remains vulnerable to climate-related shocks and rising input costs. Fertilizer and energy prices have increased due to global supply disruptions. According to the National Fertilizer Development Centre, fertilizer consumption patterns have been volatile, affecting crop yields and farm incomes. Agriculture still contributes nearly 23% to GDP and employs a significant portion of the labor force.

ADB warned that a prolonged Middle East conflict could significantly impact Pakistan’s economic outlook. Higher energy prices would raise production costs across industries and reduce household purchasing power. The report noted that remittance inflows could also weaken if economic conditions deteriorate in key Gulf countries employing Pakistani workers.

External vulnerabilities remain a key concern for policymakers. Pakistan continues to rely on multilateral and bilateral financing to meet external obligations. The International Monetary Fund’s ongoing support program has been instrumental in stabilizing the economy, with reforms focused on fiscal consolidation, energy sector restructuring, and revenue mobilization.

According to the Ministry of Finance’s FY2025 economic survey, Pakistan’s fiscal deficit remains elevated despite some improvement in revenue collection. Structural reforms, including broadening the tax base and reducing subsidies, are essential to ensure long-term fiscal sustainability. The ADB emphasized that adherence to the economic adjustment program is critical to strengthening resilience.

Global economic uncertainty also poses risks to Pakistan’s outlook. Slower growth in major economies could reduce export demand and foreign investment flows. Rising geopolitical tensions and supply chain disruptions may further complicate trade dynamics and increase import costs.

Despite these challenges, Pakistan’s medium-term outlook appears cautiously optimistic. Continued reform implementation, stable macroeconomic management, and improved investor confidence could support sustainable growth. The ADB stressed that consistent policy execution remains vital to preserving recent gains and strengthening economic buffers.

Policymakers face the challenge of balancing growth with stability. Maintaining fiscal discipline while supporting economic expansion will require careful coordination between monetary and fiscal authorities. Pakistan’s ability to navigate external shocks and sustain reform momentum will determine whether projected growth targets are achieved.

The Asian Development Bank said Pakistan’s economic recovery remains on track but vulnerable, underscoring the need for sustained reforms and prudent policies to secure long-term stability and inclusive growth.