ISLAMABAD: Pakistan’s economic growth is projected to remain at 3.7 percent in fiscal year 2027—below the government’s 4 percent target —while inflation is projected to rise to 8.3 percent, according to the Asian Development Bank (ADB).
In its report, “Asian Development Outlook,” released on Wednesday the ADB warned that escalating tensions in the Middle East, higher energy and input costs, renewed austerity, tighter global financing conditions, weak tax collection, weather shocks, and delays in structural reforms pose significant downside risks to growth and macroeconomic stability.
The Bank said growth is projected to remain at 3.7 percent in fiscal year 2027 as lingering effects of the Middle East conflict dampen macroeconomic momentum.
READ MORE: ADB trims Pakistan’s FY2027 growth outlook to 3.7%, raises inflation forecasts
Inflation is projected to reach 8.3 percent in fiscal year 2027, above the central bank’s medium-term target range, complicating monetary policy. The projection assumes a gradual moderation of inflation from the June 2026 year-on-year rate of 11.1 percent and a return to the 5 percent–7 percent range in the second half of fiscal year 2027.
Domestic fuel and logistics costs are expected to remain elevated in the first half of fiscal year 2027 amid ongoing disruptions to global energy supplies, while higher international fertiliser prices will raise agricultural input costs and food prices.
The Bank warned that the outlook is subject to significant downside risks. An escalation of the Middle East conflict could increase energy import costs, intensify inflation, and disrupt labour markets in Gulf economies, affecting workers’ remittances.
The reintroduction of austerity measures by the Pakistan government could also weigh on domestic demand and economic activity, particularly if expenditure restraint is more pronounced than anticipated, posing an additional downside risk to the economic outlook.
Other risks include tighter global financing conditions, shortfalls in tax revenue, weather-related agricultural shocks, and delays in energy-sector and state-owned enterprise reforms. Consistent implementation of reforms remains critical to reinforcing fiscal and external stability and sustaining investor confidence.
The report noted that a pickup in economic activity and rising import costs could exert pressure on the exchange rate, raising imported inflation. With the real policy rate having fallen to near zero by the end of fiscal year 2026, the central bank faces difficult trade-offs between supporting growth and returning inflation durably to the target range.
Nevertheless, the central bank has committed to a data-driven, forward-looking approach, anchoring inflation expectations over the medium term.
The current account deficit is expected to widen amid heightened geopolitical tensions and recovering domestic demand.
Stronger import growth, driven by the manufacturing recovery and persistent frictions in global energy markets, including higher freight and insurance premiums, is expected to widen the trade deficit even as petroleum prices ease.
On the export side, a rice recovery should partially reverse last year’s food export shortfall, while IT-related services are expected to remain resilient, underpinned by a growing freelance and software export base.
Workers’ remittances are projected to remain broadly stable as labour markets in the Gulf countries stabilise. Post-conflict reconstruction in these countries could boost labour demand, promote migration, and raise remittances over the medium term.
External financing conditions and reserve adequacy should remain broadly supportive, supported by multilateral and bilateral official inflows and continued central bank foreign exchange purchases. Gross international reserves are projected at over USD 21 billion by end-June 2027 (about 3.3 months of import cover), enough for near-term external stability, the Bank added.
The report further noted that sustained performance under the International Monetary Fund (IMF)’s Extended Fund Facility (EFF) program, re-entry into international capital markets, and the July and August 2026 sovereign credit rating upgrades have collectively improved investor confidence and reduced financing costs from their fiscal year 2024 peak.
It further stated that private investment is expected to be the primary demand driver, building on the 8.6 percent real expansion in fiscal year 2026. Tariff reductions on inputs for industry under the National Tariff Policy 2025–2030 and a lower corporate tax burden following a cut in the super tax should improve the investment climate. Continued fiscal consolidation should reduce the public sector’s claim on domestic financing and create space for private credit.
The Bank further stated that household spending is likely to remain subdued with real incomes compressed by the pass-through of high global energy prices. Services are expected to remain resilient with information technology exports providing a strong basis, while manufacturing faces slower momentum as elevated energy prices raise production costs.
Construction is expected to gain from budget incentives, including reduced property transaction taxes and a higher interest subsidy under the Prime Minister’s housing scheme.
Sustained implementation of economic reforms, improved external buffers, renewed access to international capital markets, and recent sovereign credit rating upgrades are expected to support investor confidence and private investment.
However, elevated energy prices and continued external uncertainty, including lingering effects of the Middle East conflict, are expected to constrain further acceleration in growth.
“Pakistan’s economy has made progress in strengthening macroeconomic stability over the past two years, with stronger growth, improved external buffers, restored market confidence, and sovereign credit rating upgrades reflecting the benefits of sustained reforms”, said ADB Country Director for Pakistan Emma Fan. “Maintaining reform momentum will be critical to unlock higher private investment, strengthen resilience to external shocks, and achieve stronger and more inclusive growth.”
The report noted that the fiscal year 2027 budget’s growth-supporting measures—revised income tax slabs, a reduced super tax, lower property transaction taxes, and tariff reductions on inputs for industry—aim to improve competitiveness and ease the tax burden on households and firms. However, their revenue cost must be offset through improved compliance and enforcement, making the Federal Board of Revenue (FBR) target ambitious.
Pressure on expenditure reflects a 16 percent increase in defence spending and higher interest payments, the latter reflecting a larger outstanding debt stock and the post-conflict increase in the policy rate. Lower power sector subsidies and smaller provincial development programs partially offset those pressures, but the latter reflect the compression of provincial resources through a reverse transfer to the federal government under Article 164 of the Constitution rather than a shift away from development spending.
Execution risks are material: if revenue targets are missed, as in fiscal year 2025 and fiscal year 2026, in-year expenditure cuts will be required again, limiting already narrow space for growth-enhancing public investment.
It further stated that external factors provide downside risks. If the Middle East conflict escalates, it could raise energy import costs, intensify domestic inflationary pressures, and prolong disruptions to the Gulf countries’ labour markets, limiting workers’ remittances.
Pakistan remains particularly exposed because petroleum accounts for a significant share of imports, while remittances from Gulf economies remain the country’s largest source of foreign exchange.
A sharper-than-expected tightening of global financial conditions would raise external borrowing costs and reduce capital inflows, straining Pakistan’s external and fiscal positions. Domestically, falling short of the FBR’s revenue target would increase financing needs and crowd out private investment, undermining the expected demand recovery.
Weather-related agricultural shocks could reduce crop production, weaken export earnings, and amplify food price pressures. Reform fatigue or implementation delays, particularly in the energy sector and state-owned enterprises, could slow productivity gains, weaken investor confidence, and risk slippage under the EFF program.
Pakistan retains important opportunities to strengthen resilience and support more inclusive medium-term growth. Sustained performance under the EFF provides a credible macroeconomic anchor, but realising medium-term potential growth will depend on the consistent implementation of structural reforms.
Fiscally, more transparency, improved tax administration, and expenditure efficiency would reinforce credibility and reduce borrowing costs. In the energy sector, cost-reflective tariffs, improved billing and collection efficiency, and private participation in distribution would boost competitiveness in industry. Progress in state-owned enterprise reforms and privatisation could help crowd in private investment and improve productivity.
Continued implementation of the National Tariff Policy would lower input costs and support export diversification beyond textiles. Pakistan’s growing information technology and digital services offer a path for export-led growth less vulnerable to commodity price volatility.
Copyright Business Recorder, 2026