ISLAMABAD(National Times)- The Asian Development Bank (ADB) on Friday upgraded Pakistan’s economic growth rate to 3.5 per cent for the current fiscal year, but warned of downside risk from global economic uncertainty amid the Middle East crisis.
“Pakistan is expected to sustain its economic performance in the medium term, with real gross domestic product (GDP) growth forecast at 3.5pc in FY2026 and 4.5pc in FY2027, from 3.1pc in FY2025, as manufacturing recovers and investment increases“, the Manila-based lending agency said in its flagship Asian Development Outlook (ADO) April 2026.
However, it warned that “despite recent stabilisation and recovery, Pakistan’s economic outlook faces significant downside risks from global economic uncertainty, leading to elevated inflationary, fiscal, and external account pressures”.
The bank had earlier forecast 3pc growth for the current fiscal year.
“Pakistan’s economy has stabilised and begun to show stronger momentum, supported by progress in implementing key economic reforms amid a challenging global environment,” said ADB Country Director for Pakistan Emma Fan.
“Growth is expected to continue in 2026 and 2027, but downside risks are significant. Sustained reform efforts are critical to preserve the growth momentum and bolster fiscal and external buffers against global shocks,” she said.
Average inflation is projected to rise to 6.4pc in FY26 and 6.5pc in FY27 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, as per the report.
The central bank is expected to ease monetary policy cautiously to stabilise inflation within its medium-term target range of 5pc–7pc.
A prolonged Middle East conflict could significantly weigh on the economic outlook by slowing growth through higher energy and fertiliser costs, weakening agricultural and industrial output, reducing remittances, and widening the current account deficit, as per the report.
The report recommended that adherence to the economic adjustment program is therefore critical to strengthening resilience and enabling sustainable and inclusive growth.
In FY26, 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, the report added.
Construction activity will be backed by fiscal incentives introduced in the FY2026 budget, alongside post‑flood reconstruction efforts.
Addressing downside challenges will require prudent macroeconomic policies and steadfast implementation of structural reforms, according to the report.
The FY26 increase reflects a quicker-than-anticipated recovery in manufacturing and less crop damage from floods than initially expected.
Large-scale manufacturing output rebounded strongly in the first half of FY26 (July–December), growing by 4.8pc as automobiles, cement, and textiles picked up, supported by accommodative monetary policy, low inflation, and renewed confidence. Provisional first quarter (Q1) FY26 GDP data indicate that damage from flooding was much less than initially feared.
Services are expected to benefit from increases in manufacturing and greater macroeconomic stability. Growth was provisionally recorded at 3.7pc in Q1 FY26, driven by livestock, large-scale manufacturing, construction, utilities, wholesale and retail trade, and transport and storage.
Fiscal incentives for construction announced in the FY26 budget and reconstruction efforts after the floods have boosted construction, which grew by 21.0pc in Q1 FY26.
On the demand side, private investment will continue to support growth. Investment is projected to increase due to accommodative monetary conditions, greater macroeconomic stability, and lower government financing requirements, freeing up funds for private sector lending, particularly for small and medium enterprises and agriculture.
The revival of privatisation, including the successful privatisation of Pakistan International Airlines (PIA), will further boost private investment. Private consumption is expected to recover as lower inflation and moderate growth increase household incomes, said the ADB report.
Remittance inflows are also projected to remain resilient, partly to aid reconstruction after last year’s floods.
The current account is projected to return to a deficit in FY26 as global energy prices rise amid the Middle East conflict. The deficit reached $1.2 billion in the first 7 months of FY26 (July–January) — reversing a $564 million surplus a year earlier and reflecting a 28.9pc increase in the deficit of goods and services to $20.5bn — because of a sharp rise in imports and continuing weak exports.
Higher growth helped merchandise imports grow by 9.8pc, reflecting higher imports of automobiles, machinery, metals, and chemicals.
Merchandise exports fell by 5.5pc, mainly because flood-related crop losses cut rice exports by about $1bn. In addition, no sugar was exported in H1 FY26, compared to exports of $343m in H1 FY25, to rebuild domestic inventory. Workers’ remittances remained resilient, rising by 11.3pc to $23.2bn in July–January FY26.
As noted, oil and gas take up a prominent share of Pakistan’s imports, and the surge in global energy prices resulting from the Middle East conflict will swell the import bill. Higher import costs, coupled with any export disruptions, will further widen the trade deficit.
If instability deepens and Gulf economies struggle, Pakistan’s remittance inflows may decline, widening the current account gap, ADB said.
Downside risks to the economic outlook remain. Pakistan is at a crucial moment with its economy stabilised and efforts underway to address key structural issues in energy, trade, investment, and state-owned enterprises.
However, expectations of rapid growth without fully tackling these issues could lead to reform fatigue and risk policy slippage.
Deploying overly loose macroeconomic policies to support higher growth could revive balance-of-payments pressures and threaten hard-earned macroeconomic stability, as per ADB’s outlook.
Externally, rising geopolitical tensions and uncertainties, especially from a prolonged conflict in the Middle East, could worsen the volatility in global commodity prices, particularly energy, and disrupt international trade. This has potential implications for domestic inflation and the external position, weighing on the growth outlook.
The ADB noted that growth accelerated in FY25, reflecting faster expansion in services, industry, and investment. Inflation fell dramatically, thanks to much smaller increases in food prices and stable commodity prices.
Growth is projected to rise further in FY26 and FY27 as manufacturing recovers and investment increases. Inflation is expected to rise, reflecting higher demand and a temporary disruption to fuel and wheat supplies.
A prolonged Middle East conflict, by raising energy and fertiliser costs, would cut growth by dampening output in agriculture and industry, while also curbing remittances from the Gulf, boosting inflation, and widening the current account deficit.
Talking about the region, the bank said the Middle East conflict was projected to weigh on developing Asia and the Pacific’s outlook.
Under an early stabilisation scenario, regional growth is projected to moderate to 5.1pc in both 2026 and 2027. Higher energy prices will raise production costs and consumer prices, while export growth will normalise following last year’s front-loading ahead of US tariff increases.
Solid domestic demand — particularly in South Asia and developing Southeast Asia — will continue to anchor growth.
After easing across many economies in 2025, inflation is projected to rise to 3.6pc this year, as higher energy prices linked to the conflict feed through.
The region enters this challenging and uncertain environment from a position of strength. Growth remained resilient at 5.4pc last year, supported by export front-loading ahead of US tariff increases, strong demand for advanced semiconductors, and robust private consumption.
The conflict in the Middle East has amplified global geopolitical risks. More persistent disruptions would push energy prices even higher, raising inflation and weighing further on growth across the region.
In addition, an abrupt tightening in global financial conditions could raise borrowing costs. New tariff increases and trade policy uncertainty could also disrupt global supply chains and weaken external demand.
