According to the Asian Development Outlook (ADO), Pakistan is expected to sustain its economic momentum in the medium term, with real gross domestic product (GDP) growth forecast at 3.5% in FY2026, up from 3.1% in FY2025, as manufacturing activity gradually recovers and investment begins to pick up. This projection reflects cautious optimism about the country’s macroeconomic trajectory following a period of stabilization.
To quote the Asian Development Bank Country Director, “Pakistan’s economy has stabilized and begun to show stronger momentum, supported by progress in implementing key economic reforms amid a challenging global environment. Growth is expected to continue in 2026 and 2027, but downside risks are significant. Sustained reform efforts are critical to preserve the growth momentum and bolster fiscal and external buffers against global shocks.”
However, inflationary pressures are expected to persist. It is projected that average inflation will rise to 6.4% in FY2026 and further to 6.5% in FY2027, primarily due to surging global oil prices and disrupted trade routes linked to ongoing tensions in the Middle East. Given that oil and gas constitute a substantial share of Pakistan’s import bill, any sustained increase in energy prices is likely to exert considerable pressure on domestic prices. A prolonged Middle East conflict could significantly affect Pakistan’s economic outlook by slowing growth through higher energy and fertilizer costs, weakening both agricultural and industrial output, reducing remittance inflows, and widening the current account deficit.
In FY2026, a rebound in private-sector investment is anticipated, driven by recent progress on reform measures and relative stability in the foreign exchange market. Effective implementation of the reform program is expected to foster a more stable macroeconomic environment and gradually remove structural barriers to growth. Economic activity in both the industrial and services sectors is likely to benefit from monetary easing, while construction activity is expected to gain momentum due to fiscal incentives introduced in the FY2026 budget, alongside ongoing post-flood reconstruction efforts.
Despite these positive indicators, Pakistan continues to face significant challenges arising from global economic uncertainty, which could lead to heightened inflationary, fiscal, and external account pressures. The reported recall of $3.5 billion in deposits by the United Arab Emirates, along with the impending repayment of a $1.3 billion Eurobond, has created immediate pressure on Pakistan’s external buffers that had been painstakingly rebuilt over the past three years. In response, Saudi Arabia extended support through a commitment of $3 billion in additional deposits to help Pakistan maintain its foreign exchange reserves and avert a fresh external financing crisis. However, this assistance also implies that the existing $5 billion deposit would no longer remain subject to the earlier rollover arrangement, effectively raising Pakistan’s liabilities to Riyadh to $8 billion.
It is pertinent to note that when the Special Investment Facilitation Council (SIFC) was established, it aimed to attract up to $100 billion in investment from Gulf Cooperation Council (GCC) countries, but progress toward this ambitious target has remained limited. Recent developments have also exposed the fragility of IMF-supported stabilization efforts. Pakistan recorded a primary fiscal surplus of 1.3% of GDP in FY2025, with a cumulative primary adjustment of 5.6% of GDP since 2022—the largest in its history. However, this consolidation has largely been achieved through heavy taxation and burdensome energy pricing policies, effectively placing the adjustment burden on existing taxpayers and ordinary citizens. Meanwhile, government expenditure has continued to rise, with non-interest spending increasing by 25% in FY2025. Recent hikes in salaries and benefits for ministers, legislators, judges, and bureaucrats, alongside visible public consumption, stand in stark contrast to official claims of austerity.
Excessively high real interest rates, combined with elevated energy costs, have eroded business competitiveness, discouraged investment, and caused exports to stagnate. Pakistan recorded its first current account surplus in 14 years in FY2025; however, this achievement was largely driven by stringent foreign exchange controls that compelled many foreign firms to exit the market. The underlying vulnerabilities remain evident in the composition of the State Bank of Pakistan reserves, which stand at $16.3 billion, of which $12.7 billion consists of deposits from “friendly” countries—funds that are subject to periodic rollover and therefore cannot be considered fully stable.
At the same time, public debt rose to 70.8% of GDP in FY2025, up from 67.7% in FY2024, primarily driven by rising interest payments. Pakistan faces an estimated $89 billion in debt amortization between FY2026 and FY2030—averaging nearly $18 billion annually. Interest payments alone have surged to 7.8% of GDP and now consume nearly three-quarters of Federal Board of Revenue revenues. The $7 billion loan program from the International Monetary Fund is barely sufficient to cover the $6.78 billion Pakistan owes to the Fund over the same period, effectively meaning that the country is borrowing to repay existing debt obligations. While such arrangements may help avert default in the short term, they have done little to address deep-rooted structural weaknesses and have, instead, reinforced economic dependency.
According to independent experts, Pakistan is burdened with dysfunctional institutions that struggle to enforce the rule of law or safeguard public resources effectively. The country’s economic crisis is often attributed to “state capture,” whereby policymaking disproportionately benefits a narrow segment of political and business elites. Without meaningful efforts to dismantle entrenched privileges and promote inclusive governance, economic stagnation is likely to persist.
Pakistan’s economic challenges are fundamentally rooted in weak governance and declining institutional quality. Decades of economic mismanagement have resulted in a substantial waste of public resources. Between 2000 and 2025, Pakistan’s average tax-to-GDP ratio remained around 9%. Had the country achieved even a modest 15%—which is still on the lower end for comparable economies—it could have generated an additional Rs45 trillion in revenue. Persistent inefficiencies in the energy sector have driven circular debt beyond Rs5 trillion, while poorly managed state-owned enterprises (SOEs) continue to incur annual losses of approximately Rs900 billion.
Without comprehensive structural reforms, a significant increase in exports, and strict fiscal discipline—including a substantial reduction in the size of government and the elimination of state-sponsored luxuries—Pakistan is likely to remain trapped in a cycle of low investment and stagnant growth. The long-term solution lies not in accumulating more foreign loans, but in putting its own economic house in order through sustainable and inclusive policy reforms.