The Asian Development Bank (ADB) has upgraded Pakistan’s economic growth forecast to 3.5% for FY2026, projecting a further rise to 4.5% in FY2027, while warning that escalating instability in the Middle East could significantly undermine inflation control, external balances, and trade performance. The outlook highlights a fragile but improving macroeconomic recovery, contingent on sustained reforms and global stability.
In its Asian Development Outlook April 2026, the ADB said Pakistan’s growth momentum is being driven by a rebound in manufacturing, stronger construction activity, and gradually improving private investment. Easing inflation and relative exchange rate stability have also contributed to renewed business confidence. Large-scale manufacturing has shown notable recovery, while reconstruction after recent floods and fiscal incentives in the FY2026 budget have supported the construction sector.
However, the Bank cautioned that this recovery remains vulnerable to external shocks, particularly rising energy prices linked to geopolitical tensions in the Middle East. Oil and gas imports account for a substantial share of Pakistan’s import bill, making the economy highly sensitive to price fluctuations in global energy markets.
Inflation is projected to rise modestly to 6.4% in FY2026 and 6.5% in FY2027, reversing the sharp disinflation seen in FY2025. The ADB attributed this to stronger domestic demand, higher fuel costs, and potential disruptions in wheat and energy imports from regions near critical supply routes such as the Strait of Hormuz. It warned that prolonged conflict could further widen Pakistan’s current account deficit by increasing import costs and reducing export competitiveness.
The report also flagged risks to remittance inflows, particularly from Gulf economies, which are a key source of external support for Pakistan’s balance of payments. Any slowdown in those economies could compound external financing pressures.
Despite these risks, the ADB noted that Pakistan achieved significant macroeconomic stabilisation in FY2025, including lower inflation, improved foreign exchange reserves, and a return to current account surplus. Growth in that year was supported by services and industry, although agriculture remained weak due to adverse weather conditions and rising input costs.
Looking ahead, the Bank stressed that sustained recovery depends on continued structural reforms in taxation, energy, trade, and state-owned enterprises. It also warned against premature fiscal or monetary easing, arguing that such measures could reignite external imbalances and threaten stability.
In broader regional terms, the ADB said geopolitical uncertainty in the Middle East poses a systemic risk to developing Asia, with higher energy prices likely to lift inflation and slow growth across the region.