The Asian Development Bank (ADB) has projected that Pakistan’s economic growth will strengthen in FY2026, underpinned by ongoing structural reforms and renewed investor confidence following a recent US-Pakistan trade agreement. However, the lender warned that devastating floods could slow down the momentum and create new inflationary pressures.
According to ADB’s Asian Development Outlook report for September 2025, Pakistan’s economy expanded by 2.7% in FY2025, driven mainly by investment in industry and services. Agriculture, however, lagged behind due to adverse weather conditions. The Manila-based institution has kept its growth forecast for FY2026 unchanged at 3.0%, citing reforms aimed at addressing structural weaknesses as a key stabilizing factor.
ADB noted that Pakistan’s macroeconomic outlook benefited from improved creditworthiness, reflected in recent upgrades of its sovereign ratings by global agencies. In addition, the US-Pakistan trade agreement has provided a significant boost to business confidence, encouraging new trade and investment flows. Together, these factors are expected to support domestic activity, while easing earlier risks linked to debt and balance of payments.
Still, the impact of recent floods looms large. The disaster has caused widespread damage to infrastructure and farmland, threatening to slow agricultural recovery and increase food inflation. Pakistan’s Prime Minister Shehbaz Sharif has urged the International Monetary Fund (IMF) to account for the economic impact of floods during its upcoming program review.
ADB highlighted that while fiscal incentives for construction and rehabilitation efforts may help offset some of the damage, structural challenges persist. The report quoted ADB’s Country Director for Pakistan, Emma Fan, as saying that Pakistan’s growth prospects remain positive, but consistent policy reform is vital for reinforcing credibility and building resilience against recurring disasters.
On inflation, ADB projects a 6% rate for FY2026, within the State Bank of Pakistan’s 5–7% target range but slightly higher than previous estimates. The increase reflects the impact of supply chain disruptions caused by floods and higher gas tariffs implemented from July 2025.
Pakistan’s external sector is also expected to remain broadly stable. Foreign exchange reserves are projected to reach $17.7 billion by June 2026, equivalent to 2.8 months of import cover. However, the report cautioned that exports may face headwinds due to disruption in rice and cotton production, two of Pakistan’s key export commodities. Faster tax refunds, improved liquidity, and reduced production costs are expected to cushion the blow for exporters, while the US trade agreement may provide a much-needed anchor for sustained trade activity.
Imports, however, are forecast to rise as the country increases food purchases to address shortages caused by flooding, alongside higher demand for raw materials in anticipation of manufacturing recovery. This trend could widen the trade deficit, ADB warned.
The outlook flagged several risks that could weigh on growth. These include delays in fiscal reforms, failure to meet revenue targets, and climate vulnerabilities. Recurring floods and extreme weather events could derail improvements in inflation, disrupt economic activity, and strain household incomes. At the same time, geopolitical uncertainty could erode external stability and weaken business confidence.
On a more optimistic note, the ADB said quicker execution of reforms and a supportive global environment could push growth above current projections.
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