Growth dips to 3.1% on energy shock
Pakistan's economic growth stands at 3.1% this fiscal year, but a brutal global energy shock is threatening to drag that figure down further, with millions of the country's poorest citizens already paying the price.
That is the central finding of the Lahore School of Economics' latest quarterly assessment for Financial Year 2025-26, released by its Modelling Lab. The report, authored by economists Dr Moazam Mahmood and Dr Azam Amjad Chaudhry, paints a sobering picture of an economy caught between fragile recovery and external pressure it cannot control.
The Modelling Lab's 3.1% GDP growth estimate sits below the government's projection of 3.7%, and also undershoots the International Monetary Fund's (IMF) 3.6% and the Asian Development Bank's (ADB) 3.5%, both of which were made before the full weight of the energy shock had set in. The World Bank's comparable estimate of 3.0% is closest to the Lahore School's number. More worryingly, the report warns that once complete data for the final months of the fiscal year comes in, growth could be revised down further to 2.8%, what the economists call a 'force majeure' growth rate.
The culprit is oil. Pakistan imports half a million barrels a day, spending around $13 billion annually on oil imports alone. In recent months, global oil prices have been running $25 to $30 per barrel above their long-term trend. A single quarter of elevated prices adds approximately $1 billion to the country's import bill. The effect has rippled through the current account, pushing it back into deficit. Imports hit $7.6 billion in April alone, while exports barely average $3.5 billion per month. The report is blunt: "The economy cannot grow without affordable energy."
On inflation, the picture is equally uncomfortable. The Lahore School estimates inflation for FY2025-26 at 9%, up from 8% last year and well above the government's estimate of just under 6%. Energy prices are the primary driver. Between June 2025 and June 2026, petrol prices rose 54%, kerosene by 85%, high-speed diesel by 53%, electricity by 25%, and natural gas by a staggering 126%. Together, the report calculates these energy price increases have contributed 4.6 percentage points to the overall inflation rate, roughly half of the total. Adding a layer of concern, the report finds that about two-thirds of the increase in consumer energy prices came not from supplier costs but from government taxation, making the state directly responsible for roughly one-third of the inflation rate.
There are some bright spots. Agricultural growth is approaching 3% after two difficult years, partly because the government reinstated the wheat support price, a policy it had abandoned to damaging effect. Large-scale manufacturing has also shown an unexpected surge, reaching 6% growth in recent quarters, driven largely by the automotive sector. Services growth has climbed to 3.7%. But the report is careful not to over-read these trends, noting: "One swallow does not a summer make."
The most alarming section of the report deals with poverty. Data from household surveys shows that extreme caloric poverty, measured against the World Bank's threshold, rose from 16.5% in FY2018-19 to 21.1% by FY2024-25 – a five percentage point jump in five years, reversing nearly two decades of progress. The report links this directly to low GDP growth and high inflation, themselves products of two major currency depreciations: 25% in 2018-19 and 40% in 2022-23.
The report credits the current government for reining in that depreciation cycle and for bringing double-digit inflation down from its peak. Managing the exchange rate under global commodity pressure, the economists acknowledge, has been no small feat. But the credit comes with a clear challenge: stabilising the rupee is necessary but not sufficient. With 21% of Pakistanis unable to meet basic caloric needs, the government must now urgently turn its attention to reviving growth, not just defending it.