Pakistan’s economic outlook is currently caught between cautious optimism and sobering warnings. On one hand, improved geopolitical dynamics have boosted business sentiment and opened potential avenues for external support. On the other, the Asian Development Bank (ADB) has raised red flags about structural weaknesses, policy inconsistencies, and fragile growth that could derail recovery if corrective action is delayed.
In its latest report, the ADB projected Pakistan’s GDP growth at 3 percent for FY26, falling short of the government’s ambitious target of 4.2 percent. The International Monetary Fund (IMF), in comparison, expects growth to be even lower, underscoring skepticism in international circles regarding the sustainability of Pakistan’s stabilization efforts. The development lender warned that any policy slippage could weaken investor confidence, push up borrowing costs, and increase external financing risks.
Government officials, including the finance minister, have been keen to present a more upbeat narrative. They highlight falling inflation, a relatively stable currency, a run of primary fiscal surpluses, and improved foreign exchange reserves with the State Bank of Pakistan (SBP). However, critics argue these achievements are largely cyclical, not the result of long-term reforms. Inflation has cooled due to demand destruction after record-high prices and the end of the global commodity supercycle, while reserves have increased largely through managed purchases rather than organic capital inflows.
Indeed, SBP’s reserves rose to USD 14.5 billion in FY25 after the central bank purchased USD 8.3 billion from the interbank market. Yet this came at the expense of choked imports and suppressed growth. The investment picture remains bleak, with net foreign direct investment standing at USD 2.5 billion last year, out of which more than USD 2 billion came from retained earnings. Fresh inflows were less than USD 500 million, highlighting Pakistan’s struggle to attract new investment.
Taxation policies are another area of concern. While Pakistan recorded one of the highest primary fiscal surpluses in its history, this was achieved through heavier taxes on an already strained base rather than expanding the tax net. Corporations, exporters, and the salaried class have faced mounting burdens. The super tax on corporations, combined with high electricity tariffs, has eroded competitiveness. Exporters, particularly in textiles, have seen margins shrink due to high input costs and declining global cotton prices. Some high-value apparel ventures have already exited the market, citing low returns.
This trend has discouraged fresh capital formation. Skilled professionals, squeezed by inflation and taxation, are increasingly seeking opportunities abroad, even at the cost of accepting lower roles and salaries. The talent drain is further weakening prospects for sustainable growth. Meanwhile, reduced public expenditure in development sectors has left investment and job creation stagnant.
The ADB’s caution highlights the need for Pakistan to use its improved geopolitical standing with the United States, Saudi Arabia, and other partners not just for short-term relief but for structural reform. Experts warn that relying on transactional aid and loans risks repeating past cycles where temporary inflows created an illusion of stability without addressing core weaknesses.
To move toward a high-growth trajectory, Pakistan must implement reforms that broaden the tax base, reduce inefficiencies in government spending, and incentivize investment in productive and export-oriented sectors. Without such steps, any relief from improved external relations will be temporary, and another cycle of crisis could soon follow.
The ADB’s message is clear: stability cannot be built on cosmetic improvements alone. Sustainable growth will require hard choices and structural change.
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