The Asian Development Bank (ADB) has painted a more cautious picture of Pakistan’s economic outlook, lowering its growth forecast while raising inflation projections amid mounting global uncertainties. The revised assessment underscores how external shocks—particularly the Middle East conflict and its impact on global energy markets—are threatening to slow Pakistan’s economic recovery despite signs of domestic stability.
According to the latest edition of the Asian Development Outlook (ADO), Pakistan’s economy is expected to grow at a slower pace in fiscal year 2027 than previously anticipated, while inflation is likely to remain above earlier projections due to persistent increases in food and fuel prices. The updated forecasts reflect the growing influence of geopolitical tensions on economies that remain heavily dependent on imported energy.
The ADB has revised Pakistan’s gross domestic product (GDP) growth forecast for FY2027 downward to 3.7 percent, compared with its earlier projection of 4.5 percent. The revised estimate also falls slightly below the federal government’s official target of 4 percent growth for the fiscal year. The multilateral lender attributed the downgrade primarily to rising energy costs and increasing pressure on workers’ remittances, both of which are expected to weigh on domestic economic activity. Pakistan’s economy remains highly vulnerable to fluctuations in international oil prices because of its dependence on imported fuel, making global energy market disruptions particularly costly.
Despite the more cautious outlook for the coming year, the ADB acknowledged that Pakistan made measurable economic progress during FY2026. Preliminary estimates indicate that the economy expanded by 3.7 percent during the fiscal year that ended on June 30, supported by stronger industrial production, continued expansion in the services sector, and modest improvements in agricultural output.
While these developments indicate that economic activity has regained momentum after several years of severe financial stress, the ADB cautioned that sustaining this recovery will require navigating an increasingly uncertain international environment. Inflation remains one of the country’s most pressing economic challenges. The ADB has revised its estimate for average consumer price inflation during FY2026 to 7.2 percent, citing higher food and fuel prices. Looking ahead, inflation is projected to accelerate further to 8.3 percent during FY2027, considerably higher than the bank’s previous forecast of 6.5 percent.
The revised inflation outlook broadly aligns with the Pakistani government’s own projection of 8.2 percent inflation for the new fiscal year. However, it also highlights the continuing pressure that rising global commodity prices are placing on households and businesses. According to the ADB, the conflict in the Middle East has become one of the most significant drivers of inflationary pressures worldwide. The disruption has affected not only crude oil supplies but also natural gas markets, fertiliser prices, transportation costs, and broader global supply chains. These developments have pushed production and logistics costs higher, increasing prices across a wide range of consumer goods.
The bank noted that Pakistan, like many developing economies, is particularly exposed to these external shocks because imported fuel plays a central role in electricity generation, transportation, manufacturing, and agriculture. Rising international energy prices eventually feed into domestic inflation through higher transport costs, increased industrial production expenses, and more expensive food production.
Beyond Pakistan, the ADB has also revised its broader regional outlook. Economic growth across developing Asia and the Pacific is now expected to moderate to 4.9 percent in 2026, down from 5.5 percent in 2025 and slightly below the bank’s previous forecast released in April. Despite the weaker outlook for 2026, the ADB maintained its regional growth forecast of 5.1 percent for 2027, reflecting expectations that energy markets will gradually stabilise as geopolitical tensions ease and supply chains recover.
The bank believes that although a framework agreement announced in June has reduced immediate concerns over energy supplies, the effects of the crisis will continue to influence global markets for some time. The conflict has expanded beyond oil markets, affecting fertiliser production, shipping routes, commodity prices, and industrial supply chains, all of which continue to place upward pressure on inflation.
Regional inflation is now forecast to average 4.3 percent in 2026, compared with 3 percent in 2025. This represents a significant upward revision from the bank’s earlier estimates. Inflation for 2027, however, remains unchanged at 3.4 percent, suggesting that price pressures are expected to ease gradually once energy markets stabilise. A major concern highlighted by the ADB is the scale of the disruption to global oil supplies during the height of the Middle East conflict. At its peak in March, more than 10 million barrels of oil per day were temporarily removed from international markets, making it one of the largest supply shocks in recent decades.
The resulting uncertainty caused Brent crude oil prices to surge dramatically. Prices climbed from approximately $71 per barrel before the escalation of the conflict in late February to nearly $144 per barrel in early April. Although prices later retreated as additional supplies entered the market and global demand softened, they remained elevated compared to pre-conflict levels. Following the announcement of a framework agreement on June 14, oil prices fell below $80 per barrel as shipping through the Strait of Hormuz gradually resumed and immediate concerns over supply shortages diminished. Even so, the ADB warned that restoring normal market conditions will take considerably longer than the decline in prices might suggest.
The bank explained that reopening critical shipping routes involves more than simply ending military hostilities. Mine clearance operations, restoration of maritime insurance, and the return of diverted tanker fleets are all necessary before supply chains fully normalise. Furthermore, damaged oil production facilities and export infrastructure in the Gulf may require months to repair, limiting production capacity even after security conditions improve.
Natural gas markets could face an even slower recovery. Unlike crude oil, liquefied natural gas shipments are more difficult to reroute, and alternative suppliers remain limited. The ADB also noted that many countries have significantly depleted their gas inventories during the crisis, reducing global energy buffers and increasing vulnerability to future disruptions.
The broader economic consequences extend beyond the energy sector. Higher fuel prices have increased freight and air transport costs, creating bottlenecks across international supply chains. Rising fertiliser prices are also expected to place additional pressure on agricultural production, increasing the risk of higher food inflation and food security challenges in many developing countries.
The ADB emphasised that the transmission of higher energy costs into consumer prices typically occurs gradually. Fuel price increases first raise transportation and production costs before filtering through to retail prices over several months. Similarly, higher natural gas prices eventually translate into increased household electricity and gas bills depending on domestic pricing mechanisms and regulatory frameworks.
Across developing Asia and the Pacific, headline inflation increased from 2.9 percent in January to 4.1 percent in May 2026. Excluding China, inflation reached 7.6 percent, reflecting persistent price pressures in several economies, including Türkiye, alongside widespread increases across much of the region.
For Pakistan, the latest ADB outlook serves as both a warning and a reminder. While the country has made measurable progress in restoring macroeconomic stability after years of financial turbulence, its recovery remains highly vulnerable to external developments beyond its control. Rising energy prices, geopolitical uncertainty, and global supply disruptions continue to threaten growth while keeping inflation elevated.
Moving forward, strengthening domestic economic resilience will require reducing dependence on imported energy, expanding exports, attracting higher levels of foreign investment, and accelerating structural reforms. Until these long-term vulnerabilities are addressed, Pakistan’s economic performance will remain closely tied to global events, leaving the country exposed whenever international markets experience fresh shocks.