Climate-induced shocks amplify Pakistan’s vulnerabilities, strain rural incomes
Pakistan’s economy enters FY2026 at a fragile but hopeful stage, with growth expected to strengthen if the momentum of the ongoing economic adjustment program is maintained. The program is designed to build macroeconomic stability, accelerate long-delayed structural reforms, enhance competitiveness, and guide the country toward a path of sustainable growth.
At the same time, the economy continues to grapple with deep structural weaknesses, most notably high energy costs, a weak tax base, and persistent governance challenges. These vulnerabilities have been magnified by climate-induced shocks, particularly the devastating floods of the current monsoon season, which damaged farmland and infrastructure, disrupted supply chains, and strained rural incomes.
The Asian Development Bank (ADB) Outlook for this month (September 2025) suggests: Despite these setbacks, there are encouraging signs of stability and opportunity. Fiscal consolidation has become the centerpiece of economic policy, with the FY2026 budget targeting a primary surplus of 2.4% of GDP through stronger tax collection and tighter spending controls. Debt-servicing costs are expected to decline as interest rates fall and deficits narrow, easing pressure on public finances. Structural reforms are also moving forward, including tariff rationalization under the updated National Tariff Policy, the digitalization of income tax refunds for exporters, and efforts to revive stalled privatizations. These reforms, combined with upgrades in Pakistan’s sovereign credit ratings and renewed business optimism following a US-Pakistan trade agreement, have boosted investor confidence. External support has also helped steady the outlook. Workers’ remittances remain a critical lifeline, foreign exchange reserves are projected to rise to $17.7 billion by mid-2026, and inflows from multilateral and bilateral partners, including climate-related assistance, are expected to provide an important cushion against external shocks.
At the same time, weaknesses continue to weigh heavily on prospects. The energy sector remains a significant burden, with high costs undermining competitiveness across industries. Climate vulnerability is perhaps the most pressing challenge, as recurring floods not only destroy crops and disrupt economic activity but also fuel food inflation and erode household purchasing power. Policy risks remain a concern as well. Any slippage in fiscal consolidation, tax reform, or governance improvements could quickly reverse fragile gains, raising borrowing costs and weakening business confidence. Trade imbalances are also likely to persist. While exports may benefit from liquidity support and tariff reforms, flood damage to rice and cotton production will keep performance subdued, while imports are expected to rise to meet food shortages and fuel the manufacturing recovery.
Prospects for growth remain closely tied to the government’s ability to sustain reform and maintain policy consistency. Investment is likely to strengthen with the support of lower interest rates, fiscal consolidation that eases government borrowing, and targeted incentives for private industry. Export competitiveness may gradually improve, though gains will depend on how quickly agricultural output recovers. Inflation is expected to rise moderately due to food supply disruptions and higher gas tariffs, but the central bank is committed to keeping it within the medium-term target range of 5%–7% through a data-driven monetary policy. On the external front, the outlook is stable. Remittances, a flexible exchange rate, and rising reserves will help balance the current account, even as imports grow.
The risks ahead, however, are serious. Domestically, failure to deliver on revenue targets or delays in critical reforms could weaken confidence and raise financing pressures. Climate change poses an even greater long-term threat, capable of reversing economic progress with each season of extreme weather. On the global stage, geopolitical tensions and uncertainty around international economic policies could destabilize trade flows and inflation trends. Yet, there is also an upside. If reforms are implemented more swiftly and global conditions prove supportive, investor confidence could strengthen further, pushing growth above current expectations and enhancing Pakistan’s resilience.
In short, Pakistan’s outlook is one of cautious optimism. Stability is slowly returning, and the groundwork for structural reform has been laid. But the path ahead requires consistency, discipline, and urgency—particularly in lowering energy costs, broadening the tax base, strengthening governance, and building resilience against climate shocks. If these priorities are met, the country will have an opportunity to transform a fragile recovery into a more durable and inclusive path of growth. – ER Report (Published in Oct 1-15,2025)
