ADB forecasts Pakistan’s economy to grow at 3% in FY2026

The Asian Development Bank (ADB) has forecast Pakistan’s economy to grow at 3% in fiscal year 2026 as the government undertakes reforms to sustain the macroeconomic reforms.

In a report, ADB said the average inflation is projected to increase to 6% in FY2026 due to the impact of devastation caused by floods and a hike in gas tariffs. In response, the State Bank of Pakistan (SBP) is expected to adopt a cautious approach to easing interest rates to stabilize inflation within its medium-term target range of 5%-7%.

The ADB said Pakistan has carried out reforms as part of the Extended Fund Facility arrangement reached with the IMF in October 2024.

However, it added that policy consistency and climate resilience remain vital to maintaining the growth momentum.

Meanwhile, the damage caused to infrastructure and the agriculture sector by recent floods is expected to impact the growth. However, fiscal incentives for the construction sector announced in the FY2026 budget are expected to “partially offset the adverse impact”.

“Pakistan’s growth prospects remain positive,” said ADB Country Director for Pakistan Emma Fan. “However, the country continues to face structural challenges, compounded by recurring disasters such as the recent floods. In this context, consistent reforms and policy implementation are essential for reinforcing policy credibility, sustaining economic momentum, and enhancing the country’s resilience.”

The ADB has forecast the economy to further strengthen in FY2026 due to improved external buffers — foreign exchange reserves, investment, etc. — and renewed business confidence following the US-Pakistan trade agreement.

Forecast

The ADB has kept its growth forecast for FY2026 unchanged due to increased economic activity spurred by the rapid easing of debt risks and the balance of payments crisis.

This was also reflected in Pakistan’s upgraded sovereign credit ratings by global credit rating agencies, as well as “renewed business confidence” following a recent US-Pakistan trade agreement.

The economic growth, however, remained contingent on structural reforms as the country continues to face “significant structural challenges and vulnerabilities, intensified by recurring climate-induced natural hazards, such as floods this monsoon season”.

The ADB has recommended “consistent policy implementation” and “policy credibility” to enhance resilience.

“Top priorities are to lower the energy sector’s high costs and tax reform to improve efficiency and fairness; others are to lower trade and investment barriers, advance reform in state-owned enterprises, strengthen the governance framework, and foster sustainability,” the report said.

The ADB has also forecast “stability” on the external front, even though exports are expected to suffer due to flood-related disruptions to rice and cotton production. However, improved liquidity — driven by faster tax refunds and lower production costs under supportive monetary conditions — may help offset the impact of reduced agricultural output.

“Additionally, the recent US-Pakistan trade agreement will alleviate uncertainty, sustaining trade and investment flows between the two countries,” the report said, adding that imports are expected to grow faster as food imports increase to address plug local demand gaps and raw material imports to spur economic activity.

Climate change, policy risks

Despite the stable economic forecast, the report has warned of several downside risks, like policy inconsistency and climate change.

“Failure to meet revenue and fiscal consolidation targets, or delays in implementing critical reforms, remain top concerns,” it said, adding inconsistent policies weaken business confidence, raise borrowing costs, and increase external financing risks.

Meanwhile, Pakistan’s vulnerability to extreme weather and natural hazards like floods threatens agriculture and infrastructure, which could reverse inflation decline, disrupt economic activity, and strain household incomes.

Moreover, global geopolitical risks, including uncertainty about international economic policies, could negatively affect inflation, external stability, and business confidence.