World Bank cuts GDP forecast to 3%

CAD may widen to $4.9b on higher energy imports, lower remittances amid war

ISLAMABAD:

The World Bank on Thursday cut Pakistan's economic growth forecast to 3% for this fiscal year due to adverse implications of the Middle East war, which is significantly lower than the estimates that Islamabad has shared with the International Monetary Fund (IMF).

In its first detailed report on the implications of the war, the World Bank also said that Pakistan's current account deficit (CAD) could widen to 1.2% of the size of the economy, equal to $4.9 billion. The projected deficit is nearly $3 billion higher than the $2 billion estimates that the government gave to the IMF last month.

The Washington-based lender released an economic update for the Middle East, North Africa, Afghanistan and Pakistan (MENAAP) region, which is mired in conflict, causing human suffering in the region and economic repercussions around the globe. The lender shaved off 0.4% from its growth projection and predicted that due to the war, Pakistan's economy would grow by 3% in this fiscal year, which is almost at last year's level.

The World Bank has recently clubbed Pakistan with the Middle East region after taking it out of South Asia. The change took place under the new World Bank president who wanted to have the regional office in India, which was not possible in the presence of Pakistan in the group.

The report's findings are based on a one-month assessment of the war, which began on February 28 when the United States and Israel attacked Iran without securing the umbrella of the United Nations Security Council.

Early last month, the federal government informed the IMF that GDP growth was expected in the range of 4% to 4.5% in fiscal year 2025-26, reflecting continued momentum in the auto, construction and garment industries. Pakistan reflected any adverse impacts of the war from the next fiscal year and apprised the IMF that economic growth was projected to remain at a similar level in fiscal year 2026-27, as higher fuel prices and weaker external demand weigh on the ongoing recovery.

The report stated that Pakistan's GDP per capita income would grow by 1.4% in this fiscal year, which is near last year's level. It showed inflation inching to 7.4% in this fiscal year, which is still within the target range set by the federal government and the State Bank of Pakistan.

The World Bank said that if oil, natural gas and related energy prices remain elevated for a sustained period, the inflationary consequences will ripple outward through multiple transmission channels. The pressure is already more pronounced in Europe and Asia than in the United States.

Higher fertiliser prices may compromise future crop yields and eventually lead to higher food prices, it added.

Inflationary pressures might compel central banks to keep interest rates higher for longer than markets previously expected, said the World Bank.

The report stated that economies of Egypt, Jordan and Pakistan face indirect but potentially significant negative spillovers, transmitted through elevated hydrocarbon prices, energy shortages, and a decline in remittances from the Gulf and tourism.

According to the World Bank, compared with a current account surplus of 0.5% of GDP in the last fiscal year, there could be a current account deficit of 1.2% of GDP, equal to $4.9 billion. A key reason for the elevated deficit is a lower projected level of remittances and higher cost of energy imports.

The report showed that Pakistan's sovereign bond spread relative to US five-year bond yields jumped from 3.9% to over 5% within a month due to the implications of the Middle East war. The report underlined that Pakistan's budget deficit may widen to 4.3% of GDP, which is higher than the target but lower than the last fiscal year due to increased profits of the central bank and higher than budgeted collection of the petroleum levy.

Oil markets entered the war period with an oversupply, providing a potential buffer against price pressures. Still, the World Bank said, as of March 27, the price of Brent crude oil stood at $112 per barrel, close to 60% higher than before the start of the conflict. It said that oil futures indicate some optimism, and prices for end-of-year delivery are trading at about $85 per barrel.

Overall, the World Bank also significantly cut the economic growth forecast for the Middle East and extended region. In January 2026, the World Bank forecast an uptick in the regional growth rate to 4.2%, which is now projected at 1.8%. For the Gulf Cooperation Council countries, economic growth is now forecast at 1.3%, down from 4.4% in January.

The World Bank said that Afghanistan's economy was also marked by a series of significant external shocks in 2025; sharp reductions in foreign aid, prolonged border closures with Pakistan, drought, earthquakes, and large-scale refugee returns from Iran and Pakistan. These shocks have led to an estimated 11% population increase in FY2025, largely driven by net migration.

The World Bank said that tensions between Afghanistan and Pakistan have been rising. But Afghanistan's economy is still projected to grow by 4% in 2026, supported by strengthening demand, higher private investment and improved absorption of returnees into the labour market, said the lender.