- Growth seen rising to 4.5% next year.
- Inflation projected at 6.4% this fiscal year.
- Middle East conflict seen as major external risk.
ISLAMABAD: The Asian Development Bank (ADB) has forecast Pakistan’s economy to grow by 3.5% in FY2026 and 4.5% in FY2027, while warning that a prolonged Middle East conflict could worsen energy-price volatility, disrupt trade and weigh on the country’s inflation and external position.
In its Asian Development Outlook April 2026, the ADB said growth in FY2026 would be supported by a quicker-than-expected recovery in manufacturing, stronger construction activity and rising private investment, underpinned by improved macroeconomic stability and renewed business confidence.
The report said, “…growth is projected to rise further in FY2026 and FY2027 as manufacturing recovers and investment increases.”
The lender said large-scale manufacturing rebounded strongly in the first half of FY2026, while fiscal incentives announced in the budget and reconstruction efforts after floods had boosted construction.
On the demand side, private investment is projected to rise as lower government financing requirements free up funds for private-sector lending, particularly for small and medium enterprises and agriculture.
The ADB, however, said inflation was likely to rise after falling sharply in FY2025, and identified higher oil and gas prices as a major risk to Pakistan’s economic outlook.
It projected inflation at 6.4% in FY2026 and 6.5% in FY2027, saying this would reflect stronger economic activity as well as temporary disruption to wheat supplies and to crude oil and liquefied natural gas from countries near the Strait of Hormuz.
The report noted that “inflation is expected to rise, reflecting higher demand and a temporary disruption to fuel and wheat supplies.”
It warned that the Middle East conflict remained a key external risk for Pakistan. “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,” the report said.
The ADB said rising import costs, coupled with any export disruption, would widen the trade deficit, while any weakening in Gulf economies could also hurt remittance inflows and add to pressure on the current account. It noted that oil and gas make up a prominent share of Pakistan’s imports, leaving the country exposed to higher global energy prices.
The report said Pakistan had achieved notable macroeconomic stabilisation in FY2025, with growth rising to 3.1% from 2.6% a year earlier, inflation falling to 4.5% from 23.4%, the current account moving into surplus and gross official reserves reaching a three-year high of $14.5 billion. Fiscal consolidation also continued, while progress under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) remained on course.
It said growth in FY2025 had been driven mainly by services and industry, while agriculture slowed sharply because of higher input costs, excessive rain and flooding during the monsoon season. Lower inflation and greater macroeconomic stability, the report added, had helped spur investment, which grew by 12% after contracting in FY2024.
Despite the improved outlook, the lender cautioned that risks remained significant. “Downside risks to the economic outlook remain,” the report said. It added: “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.”
The ADB also warned against complacency in policymaking. “Deploying overly loose macroeconomic policies to support higher growth could revive balance-of-payments pressures and threaten hard-earned macroeconomic stability,” it said.
Over the medium term, the lender said Pakistan would need to continue deeper structural reforms in trade, investment, state-owned enterprises, taxation and energy costs to avoid slipping back into the boom-bust cycle and to build resilience against external shocks.
It also said Pakistan would need to invest an additional estimated $220 million in agriculture across federal and provincial budgets to meet its 2030 climate commitments and strengthen resilience in the sector.
In the broader regional outlook, the ADB said the Middle East conflict had become a major source of uncertainty for developing Asia and the Pacific, with higher energy prices expected to lift production costs and consumer prices across the region even under an early stabilisation scenario.
