World Bank flags risks to economy

The World Bank has warned that escalating regional conflicts, climate shocks and tighter global financial conditions pose significant downside risks to economic recovery across the Middle East, North Africa, Afghanistan and Pakistan (MENAAP) region, with Pakistan among the most exposed economies due to its climate vulnerability and fragile security environment.

"Frontier market economies haven't lived up to potential since 2010," the report said.

In its Global Economic Prospects, January 2026 report, the World Bank noted that while growth across emerging markets proved more resilient than expected in 2025, the outlook remains clouded by heightened uncertainty. For the MENAAP region, major risks include the re-escalation of armed conflicts, spillovers from geopolitical tensions, extreme weather events, volatile oil and commodity prices, and the possibility of tighter global financial conditions that could restrict capital flows to vulnerable economies.

Pakistan's position within this risk landscape is particularly precarious. Classified among climate-vulnerable emerging economies, the country has faced repeated floods, heatwaves and weather-related disruptions in recent years, inflicting lasting damage on agriculture, infrastructure and public finances. The World Bank cautioned that climate-related disasters are becoming more frequent and more severe, increasing the likelihood of growth setbacks, inflationary pressures and fiscal stress for countries with limited policy buffers, conditions that closely mirror Pakistan's current macroeconomic reality.

The report highlighted that economies affected by fragility or conflict tend to experience deeper and more persistent economic scarring following shocks. Pakistan, while not classified as a conflict economy in the strictest sense, remains exposed to regional instability, particularly developments linked to Afghanistan. Ongoing humanitarian and security challenges across the border raise the risk of spillovers through refugee pressures, trade disruptions and security-related spending, which can further strain Pakistan's already stretched fiscal position.

According to the World Bank, renewed geopolitical tensions in the broader region could disrupt trade routes, investor confidence and commodity markets. For Pakistan, such disruptions would come at a sensitive time, as policymakers attempt to stabilise the economy following years of balance-of-payments stress, high inflation and IMF-backed fiscal adjustment. Any deterioration in regional security conditions could undermine investor sentiment and complicate efforts to attract foreign capital, the report suggested.

Climate risks stand out as a central concern. The World Bank warned that extreme weather events, floods in particular, can derail fragile recoveries by destroying crops, damaging transport and energy infrastructure, and forcing governments to divert scarce resources towards emergency relief and reconstruction. Pakistan's devastating floods in recent years have already highlighted these vulnerabilities, with long-term effects still visible in rural livelihoods, food prices and public debt dynamics. The report noted that climate shocks often interact with macroeconomic weaknesses, amplifying their impact in countries with high debt and limited fiscal space.

The World Bank also highlighted that in Pakistan, a current account deficit is projected to widen in FY2026/27, driven by a rise in import demand alongside strengthening growth and post-flood normalisation of remittance inflows.

In addition to climate and security risks, the World Bank pointed to global financial conditions as another key threat. While financial conditions eased in the second half of 2025 amid declining inflation and improved risk appetite, the report cautioned that sentiment could reverse quickly. A sharp correction in global equity markets, higher bond yields in advanced economies, or renewed inflation surprises could tighten financing conditions for emerging markets. For Pakistan, which relies heavily on external financing and rollover of existing obligations, such a shift could reignite balance-of-payments pressures.

Commodity price volatility also featured prominently in the World Bank's risk assessment. Although lower oil prices could provide short-term relief to oil-importing economies like Pakistan by easing inflation and reducing import bills, the report warned that sudden price swings can complicate macroeconomic management. Volatility in food and energy prices can worsen inflation expectations and social pressures, especially in countries where large segments of the population are vulnerable to price shocks.

Despite these challenges, the World Bank underscored that policy choices will play a decisive role in determining outcomes. The report stressed that emerging and developing economies that strengthen fiscal frameworks, rebuild buffers and address structural bottlenecks are better positioned to withstand external shocks. For Pakistan, this includes improving revenue mobilisation, enhancing spending efficiency and strengthening institutions to better manage climate- and disaster-related risks.

The report also highlighted the importance of international support for vulnerable economies facing compounded risks from climate change and conflict. As official development assistance budgets come under pressure globally, the World Bank called for more coordinated efforts to support climate adaptation, disaster resilience and debt sustainability in countries like Pakistan, where shocks can have disproportionate human and economic costs.