ADB warns of inflation and Middle East risks to Pakistan

Pakistan’s economic growth is projected to remain at 3.7% in fiscal year 2026-27, below the government’s 4% target, while average inflation is expected to rise to 8.3%, according to the Asian Development Bank’s latest outlook.

The ADB said higher energy, logistics and agricultural input costs are expected to keep inflationary pressures elevated. It also identified the prolonged conflict in the Middle East as a key downside risk to Pakistan’s economic outlook.

Middle East conflict poses risks

According to the ADB, a prolonged Middle East conflict could raise Pakistan’s energy import costs and put further pressure on domestic prices.

The bank also warned that weaker economic activity in Gulf countries could affect employment conditions and reduce remittance inflows from Pakistani workers.

Other risks include weaker-than-expected tax collection, climate and weather shocks affecting agriculture, tighter international financial conditions and delays in energy-sector and state-owned enterprise reforms.

The ADB said continued implementation of structural reforms would be important for strengthening Pakistan’s fiscal and external position and supporting investor confidence.

Growth improved in FY2026

Pakistan’s economy grew by 3.7% in FY2026, which ended on June 30, compared with 3.2% in FY2025, according to the ADB.

The bank attributed the improvement to resilient services, a rebound in manufacturing, recovery in agriculture and stronger private investment. However, economic activity slowed in the final quarter as the Middle East conflict affected the economy.

Agriculture grew by 2.9% in FY2026 despite flood-related losses to major crops, while private investment increased by 8.6%, supported by lower borrowing costs and improved business confidence.

The ADB also noted that Pakistan regained access to international capital markets through Eurobond and Panda bond issuances in April and May 2026. Sovereign credit ratings were upgraded by S&P in July and Moody’s in August, according to the report.