ISLAMABAD: The Asian Development Bank (ADB) on Wednesday forecast Pakistan’s economic growth rate at 3.7 per cent — lower than the 4pc budget target — and inflation at 8.3pc — higher than the official estimate of 7pc for the current fiscal year — amid downside risks stemming from the conflict in the Middle East.

“Pakistan’s gross domestic product growth is projected to remain at 3.7pc in FY2027”, the Manila-based lending agency said in its Asian Development Outlook September episode. In its latest outlook, ADB has maintained its July forecast of 3.7pc. It had earlier projected a 4.5pc growth rate for the current fiscal year in its April 2026 forecast.

“Average inflation is projected to rise to 8.3pc in FY27, above the central bank’s medium-term target range of 5pc–7pc, as elevated energy, logistics, and agricultural input costs continue to affect domestic prices”, it added.

The bank warned that the economic outlook was subject to significant downside risks. An escalation of the Middle East conflict could increase energy import costs, intensify inflation, and disrupt labour markets in Gulf economies, affecting workers’ remittances.

“The reintroduction of austerity measures by the Pakistan government could also weigh on domestic demand and economic activity, particularly if expenditure restraint is more pronounced than anticipated, posing an additional downside risk to the economic outlook”, the ADB noted.

It also highlighted other risks including tighter global financing conditions, shortfalls in tax revenue, weather-related agricultural shocks, and delays in energy-sector and state-owned enterprise reforms.

The ADB emphasised consistent implementation of reforms as critical to reinforcing fiscal and external stability and sustaining investor confidence.

It noted that Pakistan’s economic performance continued to strengthen in fiscal year 2026 (FY26, ended 30 June 2026), with growth accelerating to 3.7pc from 3.2pc in FY25. The expansion was broad-based, supported by resilient services, a rebound in manufacturing, recovery in agriculture, and stronger private investment, although the Middle East conflict slowed economic activity in the final quarter of the fiscal year.

Sustained implementation of economic reforms, improved external buffers, renewed access to international capital markets, and recent sovereign credit rating upgrades are expected to support investor confidence and private investment. However, elevated energy prices and continued external uncertainty, including lingering effects of the Middle East conflict, are expected to constrain further acceleration in growth.

“Pakistan’s economy has made progress in strengthening macroeconomic stability over the past two years, with stronger growth, improved external buffers, restored market confidence, and sovereign credit rating upgrades reflecting the benefits of sustained reforms”, said ADB Country Director for Pakistan Emma Fan.

“Maintaining reform momentum will be critical to unlock higher private investment, strengthen resilience to external shocks, and achieve stronger and more inclusive growth.“

Growth in FY26 was supported by expansion in manufacturing and services. Agriculture grew by 2.9pc, despite flood-related losses to major crops, while private investment increased by 8.6pc amid lower borrowing costs and improved business confidence, ADB said.

Fiscal consolidation continued during FY26. Gross international reserves increased, strengthening external resilience.

Pakistan’s sovereign credit ratings were upgraded by S&P in July 2026 and Moody’s in August 2026, reflecting improved macroeconomic stability, stronger external buffers, and continued reform implementation. Pakistan also regained access to international capital markets through Eurobond and Panda bond issuances in April and May 2026.

Inflation averaged 7.1pc in FY26, compared with 4.5pc in FY25, as rising food prices and higher global oil prices intensified price pressures during the second half of the year.