ADB projects gradual economic recovery for Pakistan, flags significant downside risks

Asian Development Bank on Friday said Pakistan’s economy had stabilised and was beginning to regain momentum after a period of adjustment, but warned that substantial downside risks could challenge the recovery if reform efforts lose pace or external pressures intensify.

In its latest edition of the Asian Development Outlook April 2026, the bank projected that Pakistan’s real gross domestic product growth would increase to 3.5% in fiscal year 2026 and further accelerate to 4.5% in fiscal year 2027, up from 3.1% recorded in fiscal year 2025, supported by a recovery in manufacturing and stronger investment activity.

The report noted that economic conditions improved in FY2025 as inflation declined and growth strengthened, driven by tight macroeconomic policies and progress in implementing structural reforms aimed at restoring fiscal and external stability.

Looking ahead, the bank said private-sector investment is expected to pick up in FY2026, supported by recent reform measures and a more stable foreign exchange market. Economic activity in industry and services is also likely to benefit from cautious monetary easing, while construction demand is projected to receive support from fiscal incentives introduced in the FY2026 budget and continued post-flood reconstruction.

Despite the improving outlook, the development lender cautioned that Pakistan remains vulnerable to external shocks. A prolonged conflict in the Middle East could push up energy and fertiliser prices, disrupt trade flows, and weaken agricultural and industrial output, potentially reducing remittances and widening the current account deficit.

Average inflation is forecast to rise slightly in the coming years, reaching 6.4% in FY2026 and 6.5% in FY2027, largely due to higher oil prices and trade disruptions linked to regional tensions. The central bank is expected to ease monetary policy gradually to stabilise inflation within its medium-term target range of 5% to 7%, the report said.

The bank emphasised that sustained implementation of economic reforms and adherence to the adjustment programme would be critical to strengthening resilience, preserving growth momentum, and enabling more stable and inclusive long-term expansion.