Pakistan's Economy Stabilizes with 2.7% Growth Forecast Amid Reforms, Digital Focus

The World Bank attributes the modest uptick to a rebound in private consumption and investment, supported by easing inflation, improved financial conditions, and a revival in business confidence.

Pakistan’s economy appears to be gradually regaining its footing, with real GDP growth projected at 2.7 percent for the fiscal year ending June 2025, according to the World Bank’s latest Pakistan Development Update: Reimagining a Digital Pakistan released in April 2025. This represents a slight improvement from the 2.5 percent growth recorded in the previous year and signals tentative progress in the country’s economic stabilization efforts.

The World Bank attributes the modest uptick to a rebound in private consumption and investment, supported by easing inflation, improved financial conditions, and a revival in business confidence. These developments have emerged in the context of tight macroeconomic policies, which have been essential in reversing earlier economic imbalances.

Key Macroeconomic Indicators and Sectoral Trends

Despite the improved outlook, economic activity remained subdued in the first half of FY2025, largely due to contractionary policies and structural challenges:

• Agriculture faced slow growth, hindered by adverse weather patterns and pest infestations.

• The industrial sector shrank amid rising input costs, higher taxes, and curtailed government expenditure.

• The services sector, typically a key growth driver, exhibited limited dynamism due to weak spillovers from the struggling agriculture and industrial sectors.

Although stabilization has been achieved with signs like current account and primary fiscal surpluses, the World Bank cautions that growth will remain tepid, making job creation and poverty alleviation particularly difficult in the face of Pakistan’s rapid population growth.

Reform Imperatives: A Turning Point for Sustainable Growth

The World Bank emphasizes that Pakistan is now at a critical juncture where recent stabilization gains must be transformed into sustained and inclusive economic growth. To achieve this, it recommends a suite of high-impact structural reforms, including:

• Designing a progressive and efficient tax system.

• Allowing a market-determined exchange rate regime.

• Reducing import tariffs to incentivize exports.

• Improving the ease of doing business to attract both domestic and foreign investment.

• Streamlining public sector operations to enhance efficiency and accountability.

“Pakistan’s key challenge is to transform recent gains from stabilization into economic growth that is sustainable and adequate for poverty reduction,” said Najy Benhassine, World Bank Country Director for Pakistan.

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Medium-Term Forecast and Risks

Looking forward, real GDP growth is forecast to strengthen gradually to 3.1 percent in FY2026 and 3.4 percent in FY2027, predicated on the successful continuation of stabilization policies and meaningful structural reforms. However, the World Bank warns of significant downside risks, including:

• High and persistent public debt levels.

• Delays in implementing reforms.

• Uncertain global trade dynamics.

• Exposure to climate shocks, which have increasingly disrupted economic performance.

Anna Twum, lead author of the report, noted, “Pakistan’s economy has turned the corner and stabilized. Yet, the economic outlook remains fragile.”

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Digital Transformation as a Growth Catalyst

A central theme in this edition of the Development Update is the need to harness digital transformation as a catalyst for long-term growth. The report identifies several constraints holding back Pakistan’s digital economy:

• Wide variations in connectivity quality across regions.

• High costs that hinder broadband access.

• Regulatory gaps impeding digital public service delivery.

It emphasizes the importance of expanding Digital Public Infrastructure (DPI), which includes secure digital ID systems, efficient payment platforms, and interoperable digital services. These systems could significantly improve public service delivery and business efficiency—but only if underpinned by robust legal, regulatory, and institutional frameworks.

Shahbaz Khan, co-author of the report, added, “Closing the digital divide and expanding access to digital services require targeted legal and regulatory reforms, increased private investment, and the development of key digital infrastructure.”

Regional Context: South Asia's Broader Economic Landscape

The Pakistan Development Update is released alongside the South Asia Development Update: Taxing Times, which projects regional growth to decline to 5.8 percent in 2025, 0.4 percentage points lower than previous estimates. It points to constrained fiscal space, global uncertainties, and inefficiencies in tax systems as major challenges facing the region.

The World Bank calls for enhanced domestic resource mobilization, noting that South Asia's tax revenues remain among the lowest in emerging markets, despite relatively high tax rates. Addressing tax policy inefficiencies could help countries like Pakistan build resilience and unlock new investments in human and digital capital.

Navigating Fragility Toward Inclusive Growth

While Pakistan’s economic outlook is cautiously optimistic, the path ahead is strewn with challenges. The government's ability to sustain reform momentum, strengthen institutions, and coordinate effectively across federal and provincial levels will determine whether the country can transition from stabilization to sustainable, inclusive growth.

The dual focus on macroeconomic reform and digital innovation presents a rare opportunity for Pakistan to reimagine its future. However, without bold political will and robust implementation, the risk of backsliding into instability remains.