World Bank Report Highlights Resilience, Risks, and Reform in Pakistan’s Economy

Pakistan's economy expanded by 3.0% in fiscal year (FY) 2025, up from 2.6% in FY2024, signaling cautious optimism as the country begins to recover from a period of economic instability. This modest growth was primarily driven by a resurgence in industrial activity and a robust services sector, even as the agricultural sector struggled due to extreme weather events, including recent devastating floods.

The figures were published in the World Bank's latest Pakistan Development Update 2025, titled "Staying the Course for Growth and Jobs." The report provides a comprehensive analysis of the country's macroeconomic trends, key challenges, and reform priorities. It emphasizes that while Pakistan has managed to stabilize key economic indicators, sustained progress will require accelerated structural reforms, social investment, and climate resilience.

A Balancing Act: Stabilization and Growth

The World Bank report credits fiscal tightening and prudent monetary policy with helping Pakistan control inflationary pressures, reduce the current account deficit, and achieve primary fiscal surpluses. These stabilization efforts helped rebuild some market confidence, particularly among businesses and consumers.

However, agriculture remained a weak link, dampened by flood damage, pest infestations, and broader climate vulnerabilities. The underperformance of agriculture — a sector that employs over a third of Pakistan's workforce — had ripple effects on rural livelihoods and food security.

"Pakistan's recent floods have imposed significant human costs and economic losses," said Bolormaa Amgaabazar, World Bank Country Director for Pakistan. "Dampening growth prospects and adding pressure on macroeconomic stability… strengthening social safety nets and infrastructure that protects the most vulnerable is essential."

Economic Outlook: Risks from Climate and Fiscal Tightening

Looking ahead, real GDP growth is projected to remain at 3.0% in FY2026, held back by the lingering effects of the floods and the ongoing challenges in agriculture. The World Bank expects growth to pick up to 3.4% in FY2027, contingent on:

• Continued macroeconomic stability

• Successful implementation of fiscal and structural reforms

• A recovery in agricultural productivity

• A more stable global economic environment

The report notes that tight fiscal policies will remain a necessity as Pakistan rebuilds fiscal buffers and prepares for ongoing global volatility, particularly as climate-related disasters and geopolitical tensions continue to pose threats.

Urgent Reforms: Revenue, Governance, and the Role of the State

To strengthen long-term resilience and unlock growth, the report urges the government to adopt a balanced reform strategy, combining revenue enhancement with rationalized public spending.

"Sustaining progress will require a balanced mix of revenue and expenditure measures," said Mukhtar Ul Hasan, lead author of the report. "Broadening the tax base, strengthening tax administration, and reducing the role of the state in the economy are essential."

Key priorities highlighted include:

• Broadening the tax net, especially targeting under-taxed sectors

• Privatizing or restructuring state-owned enterprises (SOEs) to improve efficiency

• Reducing energy sector losses and improving pricing mechanisms

• Enhancing transparency and governance in public sector spending

The Missing Export Engine: From Decline to Potential

A standout focus of the report is the critical role of exports in securing Pakistan's long-term economic future. The report flags a concerning trend: exports as a share of GDP have declined from 16% in the 1990s to just 10% in 2024, making the economy heavily dependent on debt and remittance-driven consumption — a combination that fuels recurring boom-bust cycles.

Barriers identified include:

• High tariffs on inputs, raising costs for export industries

• Regulatory burdens and red tape that hinder market entry

• Expensive logistics and energy costs, reducing competitiveness

• Limited access to trade finance and digital infrastructure

Despite these challenges, recent reforms offer a glimmer of hope. The approval of a National Tariff Policy is seen as a breakthrough, aiming to streamline tariff structures and lower costs for import-dependent industries.

"The government has placed export growth at the center of its development agenda," said Anna Twum, report co-author. "However, tariff reforms must be complemented by a broader strategy for long-term success."

Recommendations include:

• Establishing a market-determined exchange rate

• Strengthening trade finance access for exporters

• Improving logistics and trade facilitation

• Expanding digital infrastructure to boost IT service exports

• Deepening regional and global trade agreements

Climate Shocks and Economic Resilience

The World Bank cautions that climate-related shocks remain one of the greatest threats to Pakistan's economy. The country's repeated exposure to floods, droughts, and extreme weather events is reversing developmental gains and creating a vicious cycle of rebuilding, borrowing, and stalling growth.

To mitigate this, the report calls for:

• Investments in climate-resilient infrastructure

• Scaling up disaster risk financing

• Expanding social protection systems to support vulnerable households

• Integrating climate risk into fiscal and economic planning

Reform with Resilience

The 2025 Pakistan Development Update offers a tempered but optimistic view of the country's economic trajectory. Pakistan's return to modest growth reflects a measure of resilience, but the road to sustained development remains fraught with challenges — from climate risks and external vulnerabilities to domestic policy inertia.

The World Bank underscores the urgency of "staying the course" on reforms — particularly those that promote export competitiveness, fiscal discipline, and climate resilience — to build a more inclusive and sustainable economic future.