The World Bank credits prudent policy for steering Pakistan through the Middle East oil shock, but it says per capita growth of 1.6% is too slow to lift incomes. Its 8.2% inflation forecast already looks behind the curve.
ISLAMABAD/LAHORE: The World Bank expects Pakistan’s economy to grow 3.8% in the 2026-27 fiscal year, crediting prudent fiscal and monetary policy for helping the country absorb the oil shock from the Middle East war. It warns, however, that growth remains far too slow to make a dent in poverty, which now traps about 120 million people.
In its October 2026 Macro Poverty Outlook for Pakistan, the bank says real per capita growth of around 1.6% “remains too slow to lift incomes substantially”, and that the economy is still exposed to shocks such as a protracted regional conflict and extreme weather, including the risk of an El Niño.
“Maintaining fiscal and monetary prudence is essential to managing these risks, while structural reforms are required to lift growth, raise incomes, and reduce poverty,” the report says.
By the bank’s numbers, the fiscal year that ended in June was stronger than many feared. Real GDP at factor cost grew 3.7%, up from 3.2% in 2024-25. Services, which employ 41% of workers, led with 4.1% growth on the back of wholesale and retail trade. Agriculture, which employs 34%, grew 2.9% as strong livestock output offset weak crops. Industry slowed to 3.5%, as contraction in the energy sector and the effects of the conflict offset a solid manufacturing performance.
The external accounts held. The current account moved from a surplus of 0.5% of GDP to a small deficit of 0.1%, as imports of industrial inputs, vehicles and food rose. Remittances and information technology exports cushioned the trade gap, and financing inflows lifted foreign exchange reserves to $19.7 billion, or 2.8 months of imports, by the end of June.
The biggest improvement was in the budget. Interest payments fell from 7.8% of GDP to 5.5% as borrowing costs eased, non-interest current spending was cut by 0.3 percentage points of GDP, and tax revenue edged up to 12.5% of GDP, helped by provincial collections and the petroleum levy. The primary surplus widened to 2.9% of GDP and the overall fiscal deficit narrowed to 2.6%, the lowest in the bank’s six-year table. Public debt fell to 72.9% of GDP.
The bank also welcomed the privatisation of Pakistan International Airlines, handed to an Arif Habib-led consortium in July, and urged the government to keep going with other loss-making state enterprises.
Forecast vs Reality
For 2026-27, the bank projects growth of 3.8%, rising to 4.2% in 2027-28. That sits between the government’s 4% budget target and the International Monetary Fund’s 3.5% forecast. Livestock will keep driving agriculture, the bank says, but crop output will stay below historical averages, and high energy and commodity prices will weigh on services and industry.
It forecasts inflation of 8.2% this year, up from 7.1% last year, before easing to about 7% in 2027-28.
Inflation behind the curve
That inflation forecast looks optimistic. Consumer prices rose 10.3% in September after 11.1% in August, and averaged 10.2% in the first quarter of the fiscal year. The weekly Sensitive Price Indicator reached 11.85% in the week to October 22. The IMF expects 9.9% for the full year, and the finance ministry has said oil prices remain “the principal risk” to its outlook. To average 8.2%, inflation would have to fall sharply in the second half of the fiscal year.
The bank’s own account explains the pressure. Inflation picked up from March 2026 as the global oil shock passed through to domestic prices. Food inflation rose in the April-June quarter on higher fuel, freight and fertiliser costs and the gradual deregulation of wheat prices. Core inflation stayed high because of services. The State Bank raised its policy rate to 11.5% in April, and its monetary policy committee meets on Monday, with analysts split between holding and a further rise.
Pakistan’s poverty problem
The sharpest findings are about living standards. Using its new lower-middle-income poverty line of $4.20 a day in 2021 purchasing power terms, the bank estimates poverty rose from 44.7% in 2018-19 to 47.9% in 2024-25, or about 120.4 million people. Nearly one in four Pakistanis, 23%, lives below the stricter international line of $3 a day, and 87.1% live on less than $8.30.
The cause is a slow squeeze on wages. Real wages have fallen 3.4% since 2018, and 70% of the population saw real consumption decline. Inequality widened, with the Gini index rising from 28.4 to 32.7. Jobs have not kept up with a growing labour force: one in six new entrants found no work, unemployment rose to 7% by 2024, and most new jobs were informal, low-paid or self-employed, while productivity stagnated.
Inflation, the bank warns, “threatens to further erode real incomes of the poor, who spend a disproportionate share of their budgets on food and fuel”. Poor households are also highly exposed to farm and climate shocks, so a strong El Niño could hit them twice. “Without additional action to address structural and human capital constraints, poverty is likely to decline only gradually,” it says. The findings match what aid groups have described as rising food insecurity and hidden poverty in Pakistan’s cities.
A closer look at the bank’s table shows a less comfortable picture of where growth is coming from. Measured at market prices, the economy grew 4.8% last year, but private consumption grew only 0.9%, while government consumption jumped 11.2% and imports fell 6.7% in real terms. Households, in other words, barely increased their spending. The bank notes that private consumption is calculated as a residual and that the gap between market-price and factor-cost growth reflects shifts in taxes and subsidies, so these components should be read with caution.
Investment remains thin. Net foreign direct investment is just 0.3% of GDP, consistent with central bank data showing FDI down 32%, and the employment rate has been stuck at about 49.5% of the working-age population for four years.
GDP gains that may not last
The fiscal improvement is also expected to fade. Without new tax measures, the bank sees revenue slipping, spending rising and the primary surplus narrowing to 2.0% of GDP this year and 1.4% next. That would push the fiscal deficit back up to 3.5% and then 4.0% of GDP, still within sustainability thresholds. The current account deficit is forecast to widen to 1.0% of GDP by 2027-28 as the trade gap grows.
Reforms list by the World Bank
The World Bank’s prescription is familiar but pointed that the fiscal and monetary prudence, a broader tax base, a market-determined exchange rate, continued trade liberalisation, privatisation of loss-making state enterprises, and reform of business regulation. It echoes the conditions of Pakistan’s IMF programme, under which the government has been pressed to wind up broad subsidies such as the Rs100-a-litre petrol relief.
For Islamabad, the report offers both vindication and warning. Finance Minister Muhammad Aurangzeb has argued that growth will clock “north of 4%”, and the bank’s projected pick-up from last year’s 3.7% supports the case that stabilisation is working. Provinces such as Punjab are betting on industry and exports to push growth higher. But the report’s central message is that stability alone will not reduce poverty quickly.
For households in Lahore and across Pakistan, already facing double-digit price rises, the gap between a stable macroeconomy and a stagnant pay packet is the story of the past six years. The World Bank expects that gap to close only slowly, and only if reforms move much faster than they have so far.
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