World Bank slashes Pakistan's FY26 growth to 2.6%

The World Bank has projected Pakistan’s real GDP growth to remain around 2.6% for FY2025–26, far below government expectations, as the country continues to grapple with deep-rooted structural and external challenges.

The World Bank’s October 2025 MENAAP Economic Update paints a cautious picture of Pakistan’s economic trajectory, contrasting sharply with the more optimistic outlooks of the State Bank of Pakistan (SBP) and the Ministry of Finance.

In its September Monetary Policy Committee (MPC) statement, the SBP noted that “real GDP growth for FY26 is assessed to remain close to the lower end of the earlier projected range of 3.25% to 4.25%.”

However, the World Bank’s latest report tempers that optimism, citing lingering inflationary pressures, climate shocks, weak private investment, and limited fiscal space as major drags on recovery.

The World Bank attributes the subdued forecast primarily to the devastating impact of catastrophic floods across Punjab and Sindh, which reduced agricultural output by nearly 10%.

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Major crops, including rice, sugarcane, wheat, cotton, and maize, suffered heavy losses, threatening food security and export revenues. Agriculture, which supports nearly 40% of the labour force and contributes about one-fifth of GDP, has struggled to recover amid water shortages and damaged irrigation infrastructure.

These losses are compounded by inadequate disaster preparedness and slow rehabilitation. The report warns that if climate-related disruptions persist, Pakistan could face recurring supply-side inflation, further weakening purchasing power and rural incomes. Despite easing global food and energy prices, domestic food inflation remains volatile due to disrupted supply chains and market inefficiencies.

Externally, Pakistan’s trade performance has remained underwhelming. The report highlights that after the United States imposed new tariff measures in early 2025, Pakistan’s exports are expected to contract by up to 1.5%, the steepest decline among developing oil-importing economies in the MENAAP region.

While regional peers such as Morocco and Egypt have managed to capitalise on tourism and investment-led rebounds, Pakistan’s export base remains concentrated in low-value textile and agri-based products. Limited diversification and persistent energy bottlenecks have prevented exporters from capturing higher-value markets.

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The World Bank notes that Pakistan’s National Tariff Policy (2025–2030), which aims to cut tariffs by half over five years, could gradually enhance competitiveness. However, the benefits will take time to materialise and depend heavily on complementary reforms in logistics, taxation, and energy pricing.

The report delivers a sobering assessment of Pakistan’s social landscape. Between 2018 and 2023, the share of the population living below the international poverty line of $3 per day (PPP) surged from 16.5% to 46%, reversing years of progress. At the $4.2 per day threshold, nearly nine in ten Pakistanis now live in poverty, reflecting the combined toll of the pandemic, inflation, and climate disasters.

The World Bank warns that this sharp deterioration risks entrenching inequality and social instability. Rising poverty has been accompanied by declining school attendance, food insecurity, and informal employment. Fiscal constraints have curtailed the government’s ability to expand social safety nets, leaving millions of vulnerable households exposed to further shocks.

A key theme of the MENAAP Economic Update is the untapped potential of women in the workforce. Despite significant gains in female education, particularly at tertiary levels, female labour force participation in Pakistan remains among the lowest in the world, at just 21%.

This represents a major missed opportunity. The World Bank estimates that removing barriers to female employment could raise GDP per capita by 20% to 30%, one of the highest potential gains globally. Yet restrictive social norms, inadequate childcare, safety concerns, and limited mobility continue to suppress women’s participation, especially in urban areas.

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The report notes that many educated women are unable to find suitable jobs, resulting in wasted human capital. Younger cohorts are increasingly discouraged from entering the labour market, a trend that could have long-term implications for productivity and demographic dividends.

To reverse this, the World Bank recommends targeted interventions such as safe public transport, flexible work policies, and legal protections against workplace harassment, alongside awareness campaigns to shift societal norms. It stresses that “partial fixes will not suffice”; instead, comprehensive, cross-sector reforms are needed to integrate women into Pakistan’s economic mainstream.

Climate change remains a central threat to Pakistan’s economic stability. The floods of 2022 and 2025 caused damages worth billions of dollars, exacerbating fiscal deficits and forcing the government to divert resources from development projects to relief and reconstruction.

The World Bank cautions that recurring natural disasters could undermine long-term growth by eroding agricultural productivity, infrastructure, and fiscal space. Without large-scale investments in climate resilience—such as flood management systems, sustainable agriculture, and renewable energy—the economic costs of inaction will escalate.

Meanwhile, debt servicing continues to consume a large share of revenues, constraining public investment. With external financing dependent on IMF support and bilateral loans, fiscal flexibility remains minimal.