A fragile recovery

Though economic indicators are moving in the right direction, Pakistan's economy is still in a very fragile shape, according to the latest Asian Development Bank report. The Asian Development Outlook warns that even though the economy has stabilised, it is still perilously vulnerable to shocks beyond its control. According to the report, GDP growth accelerated to 3.7% in FY26, up from 3.2% the previous year. Gains were largely due to a rebound in manufacturing, which grew 6.6%. Resilient services grew 4.1%, and agricultural recovery grew steadily at 2.9%. Private investment rose 8.6% in real terms, and sovereign credit rating upgrades from S&P and Moody's signaled renewed investor confidence.

But these indicators are not enough to offset the fact that inflation is still concerning - it was 7.1% in FY26 and is projected to climb to 8.3% in FY27, well above the SBP's 5% to 7% target range. While external shocks - such as the conflict involving Iran and its impact on global trade and energy prices - have played an outsized role in raising prices, our economy could have absorbed these shocks more easily if it were not already on shaky ground. The government has also not done itself any favours by choosing to increase spending in several non-revenue areas - meaning that these spending increases will not increase government revenue at all. With interest payments eating up the majority of the budget and defence spending rising 16%, it will be impossible to raise revenue growth to the target of 17.6%. And with household consumption growing by less than 1% and a projected sharp drop in remittances from the Middle East, even more problems could be around the corner.

Navigating this treacherous path without a misstep is Pakistan's greatest challenge. Ironically, the IMF programme conditions that successfully stabilised the economy are now the primary obstacle to reallocating funds for long-term resilience.