ADB Raises Pakistan Growth Forecast to 3.5% Amid External Risks

The Asian Development Bank on Friday raised Pakistan’s economic growth forecast for the current fiscal year to 3.5 per cent, offering one of the clearest signs yet that the country’s fragile stabilisation drive is beginning to show measurable results. The updated outlook, released in Islamabad through the lender’s latest regional assessment, places Pakistan on a somewhat firmer footing after a difficult period marked by inflation shocks, external financing stress and repeated climate-related disruptions.

The revised estimate is an improvement from the bank’s earlier projection of 3pc for FY2026 and is accompanied by a more optimistic 4.5pc outlook for FY2027. The new assessment suggests that a recovery in manufacturing, improving investment activity and a more stable macroeconomic environment are helping the economy regain momentum. For policymakers in Islamabad, the upgrade is an encouraging endorsement at a time when the government has been trying to show that painful reforms and tighter discipline are beginning to produce results.

The ADB’s assessment points to several forces behind the stronger forecast. A rebound in large-scale manufacturing, fiscal incentives included in the current budget and reconstruction-linked economic activity after flood damage have all contributed to a better-than-expected picture. The report also indicates that private-sector investment may strengthen further as reduced government borrowing creates more room for bank lending to businesses, especially in sectors such as agriculture and small and medium enterprises.

At the same time, the lender made it clear that the recovery is far from secure. It warned that Pakistan still faces serious downside risks from international uncertainty, particularly because of tensions in the Middle East. With oil and gas accounting for a major share of Pakistan’s import bill, any sustained disruption in energy supplies or trade routes could quickly raise domestic costs, reignite inflation and place fresh pressure on the external account.

ADB Country Director Emma Fan said the economy has stabilised and is showing firmer traction, but stressed that the improvement can only be protected through continued reform. That message aligns with the report’s broader conclusion that Pakistan cannot afford to relax economic discipline too soon. The bank signalled that looser macroeconomic management could reverse hard-won gains and reopen familiar vulnerabilities in inflation, the balance of payments and fiscal management.

Inflation, in particular, remains a major concern even as headline pressures have cooled from past peaks. The bank expects average inflation to move higher again, projecting 6.4pc in FY2026 and 6.5pc in FY2027. The reason is not only stronger domestic activity, but also the possibility of rising fuel costs and trade disruptions spilling into transport, food and industrial production. In a country where imported energy prices rapidly feed through to household budgets and business costs, even a moderate external shock can travel quickly across the economy.

The report also sheds light on the policy balancing act facing Pakistan’s central bank and finance managers. Monetary easing may support industry and services, but it will need to be handled carefully so that growth support does not come at the expense of renewed instability. A stable exchange market, restrained fiscal policy and follow-through on structural reforms in taxation, energy and state-owned enterprises remain central to keeping investor confidence intact.

For Pakistan, the significance of this forecast goes beyond a single percentage point. A higher growth projection can improve market sentiment, strengthen the government’s case before investors and lenders, and provide a political argument that the economy is moving away from crisis management toward a more durable recovery path. It also matters for businesses weighing expansion plans, banks assessing credit appetite and households hoping that greater stability will eventually translate into jobs and lower price volatility.

Still, the path ahead remains exposed to events beyond Pakistan’s control. A prolonged regional conflict, higher fertiliser and fuel costs, weaker remittances from Gulf economies or disruptions to agricultural output could all undercut the recovery. The ADB’s message is therefore optimistic but conditional: Pakistan has regained some economic momentum, but it will need disciplined policymaking, continued reforms and a degree of external calm to turn this upgraded forecast into sustained, broad-based growth.