Pakistan’s economy is likely to remain on a gradual but modest recovery track, with the Asian Development Bank (ADB) predicting growth at 2.5% in fiscal year 2025 and 3% in 2026. But the ADB has cautioned that this nascent rebound is very much exposed to domestic as well as external risks and invited policymakers to remain firmly committed to reforms and not fall into the trap of premature policy easing.

The international lender has estimated Pakistan’s economy to expand by 2.5% in the current fiscal year but cautioned that the nation’s fragile recovery path remains susceptible to derailment. The bank stressed that any deviation from the International Monetary Fund (IMF) reform program or early optimism could jeopardize the nation’s progress toward economic stability. In its most recent Asian Development Outlook (ADO) report, the Manila-based bank presented a positive outlook for South Asia, estimating it will be the fastest-growing sub-region. It forecasts South Asia to record growth rates of 6% in 2025 and 6.2% in 2026, an increase from 5.8% in 2024. India is estimated to lead the region, with forecasted expansions of 6.7% in 2025 and 6.8% in 2026.

For the overall Asian region, growth is expected at 4.9% in 2025, followed by 4.7% in 2026. Nevertheless, the report identified enduring headwinds such as China’s property crisis and issues of international trade. It also mentioned that the complete economic impact of the additional US tariffs announced on April 2 had yet to be incorporated in these forecasts.

Pakistan’s future development greatly depends on the continuation and effectiveness of its current economic reforms within the IMF format, which has been instrumental in stabilizing Pakistan’s macroeconomic fundamentals. An important step, the report noted, is the passage of all four provincial legislatures of the law to subject agricultural income to taxation — an action regarded as a key milestone toward more equitable and wider taxation.

Even with these reform efforts, Pakistan still suffers from inherent structural vulnerabilities and rising fiscal pressures. The ADB emphasized that consistent and disciplined policymaking is crucial to enhance resilience and promote long-term, inclusive economic growth. The report also noted the fiscal burden imposed by attempts to contain budget deficits. The government had to cut development expenditures to offset the rise in interest payments, which devoured a growing portion of public resources. Subsidy reforms and stricter budget discipline did manage to lower non-interest current spending from 10.6% of GDP in FY2023 to 9.9% in FY2024.

Meanwhile, debt servicing charges jumped but the expense of servicing debt was extravagant, with interest outlays increasing from 6.8% to 7.7% of GDP, consuming a whopping 61% of government revenues. The ADB credited this steep increase to both elevated policy interest rates and the swift accumulation of public debt, which increased by 20.3% each year over the last two years, reaching Rs71.2 trillion — about 67.5% of GDP — by June 2024. The lion’s share of this load was domestic borrowing, which accounted for 95.5% of the government’s overall debt obligations.

The bank expects Pakistan’s economic recovery to spill over into the medium term, forecasting GDP growth of 2.5% in fiscal year 2025 and 3% in 2026. But it warned that this scenario is overshadowed by a number of major downside risks that would upset progress. The report emphasized that if Pakistan’s external accounts strengthen and inflation declines more rapidly than anticipated, policymakers may be tempted to relax economic constraints prematurely. Such a step, the ADB cautioned, would undo recent progress and revive balance-of-payment pressures, erasing gains so far.

Equally, if fiscal responsibility falters — either from poor revenue capture or increasing government spending — the nation’s debt burden can rise even further, increasing borrowing costs. This situation would crowd out private sector lending and place further pressure on the exchange rate.

The ADB also warned of diminished financial assistance from international lenders and development partners if Pakistan drifts off the path of its reform agenda. A fall in policy consistency would disturb the stream of foreign funds, subjecting the rupee to additional pressures and making economic management even more complicated.

Political uncertainty was also identified as a major weakness. Increased political tensions would undermine business confidence, deter private investment, weaken household spending, and arrest economic momentum. The report further stated that bad weather, particularly insufficient rains or the beginning of drought, is another threat — not just to the nation’s growth but also to its food security. Worldwide, Pakistan remains vulnerable to commodity and food price spikes and any sudden changes in global trade policies, which would result in increased interest rates and exchange rate volatility.

In spite of these issues, the ADB noted some positives. The report indicated that both the industry and services sectors are poised to benefit from better macroeconomic conditions and continued interest rate easing. Restored investor confidence, backed by a more stable exchange rate and continuing reform efforts, is also likely to drive private investment. Besides, robust remittance flows, tempering inflation, and easier monetary policy are anticipated to boost household spending, supporting growth. Inflation is projected to be at an average of 6% in FY25 and 5.8% in FY26 — within the central bank’s medium-term goal of 5% to 7%.

The recent moderation in inflation was in general line with expectations, the ADB stated, attributing the fall to softer food prices, stable global energy and commodity prices, tepid domestic demand, and an easy comparison against last year’s high inflation base. But the report cautioned that core inflation — while moderating — is still uncomfortably high. Prices will tick higher again in the coming months, particularly as future reforms in the gas industry, such as an increase in tariffs for captive power plants, will likely drive up cost of production for industries dependent on private power generation.

Although Pakistan’s short-term prospects bear some semblance of stability, the ADB emphasized that the country’s recovery is dependent on sustained reform efforts, tight fiscal discipline, and navigating both global and domestic uncertainties. Strong remittance flows, moderating inflation, and better investor sentiment can continue to drive momentum — but in the absence of consistent policies and resilience to external shocks, the path to sustained economic stability remains uncertain.