PAKISTAN: Sustained Reforms Needed for Inclusive Growth, Economic Stability and Flood Recovery

ISLAMABAD, October 28, 2025 -Pakistan's economy expanded by 3.0 percent in the fiscal year ending June 2025, up from 2.6 percent in the previous year, reflecting a rebound in industrial activity and an expansion in the services sector. According to the World Bank's latest Pakistan Development Update: Staying the Course for Growth and Jobs, released today, growth is projected to remain at 3 percent for the fiscal year ending in June 2026, due to the impacts of recent floods on the agriculture sector, before picking up in the medium term as ongoing stability and continued reforms enhance growth prospects.

Fiscal tightening and appropriate monetary policy helped anchor inflation and support current account and primary fiscal surpluses amidst a challenging global and domestic environment. Improved confidence supported industry and service sector growth, even as agriculture growth underperformed, in part due to adverse weather and pest infestations. While favorable, the economic outlook has been tempered by recent floods, which have resulted in significant impact on people and damage to urban areas and agricultural land.

"Pakistan's recent floods have imposed significant human costs and economic losses, dampening growth prospects, and adding pressure on macroeconomic stability," said Bolormaa Amgaabazar, World Bank Country Director for Pakistan. "Staying the course on reforms and accelerating job creation is critical to maintaining growth along with strengthening social safety nets and infrastructure that protects the most vulnerable citizens, and that will help ensure sustainable development and economic resilience for all."

Immediate and lingering impacts of the recent floods are expected to weigh on growth, with real GDP growth projected to remain at 3.0 percent in FY26. Predicated on continued macroeconomic stability and commitment to key economic reforms, growth is projected to pick up to 3.4 percent in FY27 but will likely remain constrained amid tight fiscal policies aimed at rebuilding buffers amid continuing global policy uncertainty and vulnerability to natural disasters and climate shocks.

"Sustaining progress will require a balanced mix of revenue and expenditure measures to manage flood impacts while maintaining progress towards fiscal consolidation," said Mukhtar Ul Hasan, lead author of the report. "Urgent implementation of priority fiscal reforms is essential, including broadening the tax base, strengthening tax administration, and reducing the presence of the state in the economy through state-owned enterprise divesture and rationalizing the public sector."

A special focus chapter of the report highlights the critical role of exports in achieving long-term economic growth and stability. Pakistan's exports have declined from 16 percent of GDP in the 1990s to around 10 percent in 2024, leaving growth dependent on debt and remittance-driven consumption which underlies Pakistan's recurrent boom-bust cycles. The chapter cites high tariffs, cumbersome regulations, and costly energy and logistics as key constraints, noting that recent tariff reforms mark a historic step toward openness. The chapter calls for broader measures including a market-determined exchange rate, stronger trade finance, improved logistics and compliance, deeper trade agreements, and expanded digital and energy infrastructure to drive export-led growth, including in emerging IT services exports.

"The government has placed export growth at the center of its development agenda and has made important strides in tackling policy and structural barriers, most recently through the approval of the National Tariff Policy, which will help lower costs for critical imported inputs," said Anna Twum, co-author of the report. "However, tariff reforms alone will not suffice and must be complemented by broader measures to ensure a market-determined exchange rate, strengthen trade finance, enhance trade facilitation, and expand access to export markets."

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The World Bank Group in Pakistan

Pakistan has been a member of the World Bank since 1950. Since then, the World Bank has provided over $48.3 billion in assistance. The current portfolio has 54 projects and a total commitment of $15.7 billion.

IFC has invested approximately $13 billion in Pakistan since 1956, with a diverse range of projects supporting renewable energy, financial inclusion, infrastructure development, agribusiness, manufacturing, housing, healthcare, and trade, among others.

For more information, read the Pakistan Country Partnership Framework 2026-35 document