Pakistan’s economic outlook depends largely on ongoing reforms’ success: ADB

The Asian Development Bank (ADB) said on Wednesday that Pakistan’s economic outlook depends largely on the success of ongoing reforms and projected its growth at three per cent in the fiscal year 2025-2026.

‘Asian Development Outlook’, the Manila-based lending agency’s annual flagship report, said provisional quarterly growth data for the first quarter of FY 2025 ending on June 30, suggested a sustained but slow recovery as performance in agriculture, industry and services remained lukewarm.

Noting that Pakistan still faces substantial vulnerabilities and structural changes, the ADB said that economic recovery was projected to continue in the medium term, with growth forecast at 2.5pc in FY 2024-25.

The ADB stated that the forecasts were finalised before the announcement of “reciprocal” tariffs on dozens of rivals and allies alike by the US administration on April 2.

According to ADB, although ongoing fiscal consolidation and weaker farm income attributable to an anticipated decline in key crop production will constrain activity in FY2025, effective implementation of the reform programme should foster a more stable macroeconomic environment and gradually remove structural barriers to growth.

A rebound in electricity generation and gas and water supply also suggests potential revival in industry. Economic activity in both industry and services will benefit from further monetary easing and ongoing macroeconomic stability.

Economic activity will also benefit from a recovery in private investment, strengthened by perceptions of greater economic stability, along with recent and expected future monetary easing and a stable foreign exchange market. Strong remittance inflows, lower inflation, and monetary easing should support private consumption and growth, the report said.

It noted that economic reform has progressed considerably under an IMF Extended Fund Facility arrangement that began in October 2024, enhancing macroeconomic stability. Agricultural income became taxable across Pakistan after all provinces successfully passed the Agriculture Tax Bill, 2025.

The reform programme implementation has been strong in several other areas, including the planned fiscal consolidation to durably reduce public debt, maintenance of sufficiently tight monetary policy to maintain low inflation, improvement of the energy sector viability, and implementation of Pakistan’s structural reform agenda to accelerate growth.

‘Inflation to rise to 6pc’

The ADB estimated that the average inflation is projected at 6pc in FY2025 and 5.8pc in FY2026.

It said the overall inflation outlook was susceptible to multiple risks emanating from volatile global commodity prices, unfavourable changes in global trade policies, the timing and magnitude of administered energy tariff adjustments, as well as any additional measures to meet the government’s revenue targets.

However, the ADB report warned that the economic outlook faces significant downside risks, as an improved external position and a quicker-than-anticipated drop in inflation could encourage the government to relax macroeconomic policies, possibly triggering a reemergence of balance-of-payment pressures and jeopardising Pakistan’s hard-earned macroeconomic stability.

Deviation from projected fiscal consolidation due to revenue underperformance or pressures from recurrent expenditures could boost government debt, thereby increasing borrowing costs, possibly crowding out private borrowing and undermining exchange rate stability. Policy lapses could also jeopardise disbursements from multilateral and bilateral partners, cutting financial inflows and intensifying pressure on the exchange rate, the ADB said.

Notably, the bank warned that the ongoing recovery in business confidence might wane if political tensions were to escalate, curtailing private investment and consumption and weakening growth.

Insufficient rain and the potential for drought could undermine food security, also threatening growth. Externally, the main risks to the outlook stem from a rise in global food and commodity prices and changes in global trade policies that might adversely impact global interest rates and exchange rate stability.

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