The conflict in the Middle East is slowing Pakistan's economic recovery. In its September Asian Development Outlook, the Asian Development Bank (ADB) forecasts that GDP growth will remain at 3.7% in FY2027. It expects inflation to average 8.3%, above the State Bank of Pakistan's medium-term target of 5-7%. According to the Manila-based lender, higher energy and transport costs and pressure on the rupee will make the recovery harder.
The forecast is not entirely negative. The ADB says that Pakistan's continued compliance with its IMF Extended Fund Facility, its return to international capital markets and credit-rating upgrades in July and August 2026 have increased investor confidence. These developments have also reduced borrowing costs from their peak in FY2024.
The bank expects private investment, which grew by 8.6% in real terms in FY2026, to be the main source of demand. Lower tariffs on industrial inputs under the National Tariff Policy 2025-2030 and a reduction in the super tax should also support investment.
Consumers are expected to remain cautious because high global energy prices are reducing real incomes. The ADB expects services to remain strong, helped by IT exports. Manufacturing, however, is likely to slow as energy costs rise. Construction should benefit from lower property-transaction taxes and larger interest subsidies under the prime minister's housing scheme.
Inflation stood at 11.1% in June 2026. The ADB's forecast assumes it will gradually ease and return to the 5-7% range in the second half of FY2027. Fuel and transport costs are expected to remain high during the first half of the year, while more expensive imported fertiliser will raise farm costs and food prices. Faster economic growth and higher import costs could weaken the rupee and increase inflation further.
This creates a difficult choice for the central bank, the ADB says. By the end of FY2026, the real interest rate, after adjusting for inflation, had fallen close to zero. The SBP must therefore choose between supporting growth and bringing inflation back to target.
The ADB described the government's fiscal targets as ambitious. The FY2027 budget aims for a consolidated fiscal deficit of 3.6% of GDP and an underlying primary surplus of 2%, in line with IMF commitments. Federal Board of Revenue (FBR) collections are expected to grow by 17.6%, raising them from 10.2% to 10.6% of GDP. Because the budget also includes tax concessions, the ADB says the revenue target can be met only through better compliance and enforcement.
The current-account deficit is expected to widen. Imports are likely to rise as manufacturing recovers, while higher shipping and insurance costs will continue to affect energy imports even if oil prices fall. Even so, gross international reserves are expected to exceed $21bn by the end of June 2027, enough to cover about 3.3 months of imports.
The biggest risk is that the conflict escalates. The ADB warns that this would raise energy-import costs, increase inflation and disrupt labour markets in the Gulf, reducing remittances. Pakistan is especially exposed because petroleum accounts for a large share of its imports, and remittances from Gulf economies are its largest source of foreign exchange.
The bank also identifies other risks: tighter global financial conditions, revenue shortfalls, weather damage to agriculture and delays in reforming the energy sector and state-owned enterprises. It says IMF-supported reforms, energy-sector improvements, privatisation and growth in IT services could improve Pakistan's medium-term prospects. Expanding digital exports, the ADB argues, would make Pakistan's export growth less dependent on volatile commodity prices.