The Asian Development Bank (ADB) on Wednesday kept Pakistan's economic growth forecast at 3.7%, the third lowest in South Asia and below the official target, and said that the government may have to slash expenses due to any shortfall in tax collection by the Federal Board of Revenue (FBR).
In its flagship Asian Development Outlook, the Manila-based lending agency said that household consumption in Pakistan would remain subdued in the current fiscal year due to a rising cost of living. It put the inflation forecast at 8.3% for the new fiscal year, the second highest in the region after Bangladesh. Inflation will remain above the central bank's medium-term target range, complicating monetary policy, according to the ADB. It said that economic growth was projected to remain at 3.7% in fiscal year 2026-27 as lingering effects from the Middle East conflict dampened macroeconomic momentum.
At 3.7%, Pakistan will be the third slowest growing economy in the region after Afghanistan and the Maldives. India is projected to grow at 7.1%, the second highest in the region, and Bhutan at 7.2%.
The ADB said that Pakistan's domestic fuel and logistics costs were expected to remain elevated in the first half of fiscal year 2027 amid ongoing disruptions to global energy supplies, while higher international fertiliser prices would raise agricultural input costs and food prices.
Expenditure cuts
The ADB said that there was pressure on expenditure, which reflected a 16% increase in defence spending and higher interest payment allocations for the current fiscal year. Lower power sector subsidies and smaller provincial development programmes partially offset those pressures.
However, the lower provincial development spending was because of compression of provincial resources through a reverse transfer to the federal government under Article 164 of the Constitution rather than a shift away from development spending, stated the report. "Execution risks are material: if revenue targets are missed, as in fiscal year 2025 and fiscal 2026, in-year expenditure cuts will be required again, limiting already narrow space for growth-enhancing public investment," it said.
The ADB said that the FBR missed the IMF-given tax target for the last fiscal year by a wide margin of Rs969 billion. For the current year, the government has set a target of Rs15.263 trillion and its achievement is critical to giving Rs1 trillion in provincial grants to the federal government.
Domestically, falling short of the FBR's revenue target will increase financing needs and crowd out private investment, undermining the expected demand recovery, according to the lender.
The report underlined that the FBR revenue held flat at 10.2% as a share of GDP, indicating that tax base expansion remained limited. But petroleum levy collection increased 44.5%, said the lender.
The ADB urged more transparency in fiscal matters, improved tax administration and expenditure efficiency to reinforce credibility and reduce borrowing costs. The report stated that continued fiscal consolidation should reduce the public sector's claim on domestic financing and create space for private credit. But household spending is likely to remain subdued with real incomes compressed by the pass-through of high global energy prices.
Services are expected to remain resilient with information technology exports providing a strong basis, while manufacturing faces slower momentum as elevated energy prices raise production costs. Construction is expected to gain from budget incentives, including reduced property transaction taxes and a higher interest subsidy under the prime minister's housing scheme.
External sector
The ADB said that external factors were posing downside risks to Pakistan's economy. If the Middle East conflict escalates, it could raise energy import costs, intensify domestic inflationary pressures and prolong disruptions to the labour markets of Gulf countries, limiting workers' remittances, according to the regional lender.
Pakistan remains particularly exposed because petroleum accounts for a significant share of imports, while remittances from the Gulf economies remain the country's largest source of foreign exchange. A sharper-than-expected tightening of global financial conditions will raise external borrowing costs and reduce capital inflows, straining Pakistan's external and fiscal positions, according to the report.
The current account deficit is expected to widen amid heightened geopolitical tensions and recovering domestic demand. Stronger import growth, driven by the manufacturing recovery and persistent frictions in global energy markets, including higher freight and insurance premiums, is expected to widen the trade deficit even as petroleum prices ease.
The ADB said that workers' remittances were projected to remain broadly stable as labour markets in the Gulf countries stabilised. Finance Minister Muhammad Aurangzeb said last week that remittances were projected to grow to $44 billion in the current fiscal year.
The report noted that Pakistan's sovereign credit profile strengthened markedly, with international rating agencies upgrading the country's ratings five times in 2025 and 2026, reflecting improved macroeconomics by manufacturing.
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