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 growth forecasts were finalised before the April 2 announcement of new tariffs by the US administration, so the baseline projections only reflect tariffs that were in place previously. However, the report does feature an analysis of how higher tariffs may affect growth in Asia and the Pacific.
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 in FY2025’
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.
SBP expected to adopt ‘cautious approach’ to monetary policy
On interest rates, the ADB said the State Bank of Pakistan (SBP) was expected to adopt a cautious approach to easing monetary policy.
Last month, the SBP hit pause on its multiple rounds of monetary easing, keeping the key interest rate unchanged at 12 pc.
“Encouragingly, it has committed to maintaining a proactive monetary policy framework, aiming to keep real interest rates sufficiently positive to stabilise inflation within its medium-term target range,” the ADB report stated.
Sustaining fiscal consolidation and mitigating fiscal risks from state-owned enterprises, particularly in energy, remain crucial to the economic outlook, it highlighted.
The lending agency stated that fiscal discipline and lower interest rates were expected to cut full-year interest payments sharply, generating the necessary fiscal space for much-needed social and development spending. “A stronger effort in policy and administrative reform is essential to address slippage in retail and overall tax collection, and in implementing provincial agriculture taxes,” it stressed.
The current account deficit is expected to remain contained in FY2025, according to ADB. Imports are expected to rise during the rest of FY2025 as economic activity strengthens, backed by monetary easing and stable macroeconomic conditions, potentially erasing the accumulated surplus in the current account balance, it added.
It noted: “Remittances rose by almost one-third to $20.8 billion during the first seven months of FY2025 and are expected to remain robust in the remainder of the year, supported by greater exchange rate stability, improvements in digital payment infrastructure, and an increase in migrant workers.
“The anticipated increase in workers’ remittances and the realisation of projected financial inflows are likely to raise official reserves to $13.0bn (2.9 months of import cover) by June 2025,” the bank said.
Regional outlook
Meanwhile, economies in developing Asia and the Pacific are projected to grow 4.9pc this year, down from 5pc last year, according to the ADB forecast.
Solid domestic demand and strong global appetite for semiconductors driven by the artificial intelligence boom are supporting growth, but tariffs and trade uncertainty will act as a headwind, it predicted.
While regional growth is expected to decline further to 4.7pc next year, inflation is projected to moderate to 2.3pc this year and 2.2pc next year as global food and energy prices continue to decline, the ADB report said.
The report notes that while economies in the region are resilient, faster and larger-than-expected changes in US trade and economic policies pose risks to the outlook. Along with higher US tariffs, increased policy uncertainty and retaliatory measures could slow trade, investment, and growth.
“Economies in developing Asia and the Pacific are supported by strong fundamentals, which are underpinning their resilience in this challenging global environment,” said ADB Chief Economist Albert Park.
“Rising tariffs, uncertainties about US policy, and the possibility of escalating geopolitical tensions are significant challenges to the outlook. Asian economies should retain their commitment to open trade and investment, which have supported the region’s growth and resilience.”
