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Pakistan's economic resilience faces test amid geopolitical tensions
Robust remittance inflows, resilient manufacturing, and stable inflation support a moderately positive 2026 outlook, though external shocks may test the recovery
- PUBLISHED: Mon 23 Mar 2026, 12:09 PM
Pakistan’s economy has once again demonstrated its resilience, regaining growth momentum on the back of rising remittance inflows and robust large scale manufacturing — most notably in the automobiles, textiles, and petroleum sectors. However, experts caution that geopolitical tensions and a deepening energy crisis could jeopardize these gains, potentially placing significant obstacles in the country’s path.
Leading economists, officials and analysts said Pakistan’s economic outlook for 2026 remains moderately positive, with gross domestic product (GDP) growth projected around 3.6 per cent by the IMF and 3.1 per cent by the World Bank.
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“Agriculture is improving with better input availability and rising crop output, while robust remittance inflows continue to strengthen the external sector and foreign exchange reserves. Improved fiscal discipline, stable inflation, and expanding IT and services exports further underpin Pakistan’s gradual economic recovery and medium-term growth prospects, according to experts.
Some experts also warned that the country’s fiscal vulnerabilities, global uncertainty, and ongoing trade fragmentation pose significant downside risks, which could weaken demand and reduce export performance. “Pakistan’s fiscal vulnerabilities remain significant. High financing needs and reliance on reforms to maintain consolidation mean any policy slippage or external shock could destabilise progress.”
Testing economic resilience
Dr Ashfaq Hasan Khan, Director-General of National University of Sciences and Technology (Nust), said Pakistan’s economic outlook for fiscal year 2025–26 will likely be more of the same, provided the current storm in the Middle East blows over soon. If the conflict drags on, however, he warned the outlook could go from bad to worse.
“Some fresh developments have come to light in the Middle East, and they could throw a wrench into the works, not only for Pakistan’s economy, but for the region and the wider world. The damage will hinge on how long this crisis continues,” Dr Khan told Khaleej Times.
Elaborating, he said the ongoing conflict could choke oil supplies due to a potential closure of the Strait of Hormuz, sending commodity prices through the roof. Likewise, gas supplies to Pakistan and global markets may also be disrupted, casting a long shadow over the world economy.
“Oil supplies might bounce back quickly if things return to normal, but gas flows will take time to get back on track. That delay will continue to weigh heavily on Pakistan and the global economy. Pakistan could face sky high inflation and interest rates, leading to slower economic growth, fewer job opportunities and rising poverty,” he said.
He added that Pakistan may also face a balance-of-payments squeeze and a widening current account deficit if global oil prices remain elevated. “The government needs to keep its head and handle the situation wisely if it wants to steer the country out of trouble,” he noted.
“In my view, the government overreacted by hiking petrol prices by Rs55 per litre. It wasn’t necessary at this stage. Instead of passing the buck to ordinary people just to plug the Federal Board of Revenue’s shortfall, alternative measures should have been considered,” he said.
Fuel rationing
Dr Khan, who has also served as Economic Advisor, Special Secretary Finance and Director-General of the Debt Office of the Ministry of Finance, suggested that the government should consider fuel rationing to reduce the oil import bill, keep a check on the balance-of-payments and contain current account deficit.
“I strongly recommend shutting petrol pumps and gas stations for three days a week to curb fuel consumption. We need to get our house in order and build an efficient energy system that ensures a steady oil and gas supply from Monday to Thursday, at least until the crisis blows over,” he said.
He added that the government must tighten its belt by limiting unnecessary travel by top officials, including the Prime Minister, whose large motorcade consumes significant fuel.
“The Prime Minister and senior officials should hold more online meetings and cut back on unnecessary trips to reduce fuel usage in the midst of the Middle East crisis,” he said.
Dr Khan also advised against closing universities and colleges, noting that online education in Pakistan cannot fill the shoes of in person learning due to power outages, slow internet and inadequate digital platforms.
“We saw what happened during the pandemic. The quality of online learning was far from ideal in the 2020–21 academic year. We should avoid falling into the same trap and stick to on campus education,” he said.
Economic stability in focus
Muzammil Aslam, Minister of Finance, Khyber Pakhtunkhwa, said Pakistan’s economy is currently in a stabilisation phase despite geopolitical tensions in the region.
While evaluating economic performance in ongoing financial year 2025-26, he said the current account moved into near balance (-0.6% of GDP) after years of chronic deficits, supported by remittances exceeding $30 billion and import compression.
“This gives the rupee greater stability and foreign exchange reserves are projected to increase by about $7 billion during 2025-26. However, export performance has been disappointing — $30–35 billion export base has remained stubbornly flat for years. Foreign direct investment has also contracted in real terms, and investor confidence surveys reflect hesitancy,” Aslam told Khaleej Times.
The minister is of the view that geopolitical tensions pose significant exogenous risks that could disrupt energy markets, global trade flows, and financial stability. Such shocks would also complicate fiscal planning, as higher import costs and pressure on foreign exchange reserves could widen the fiscal deficit and constrain the government’s fiscal space. “Revenue growth likely to face uncertainty, the government may encounter greater borrowing pressures, while shifts toward safe-haven assets like gold could divert savings from productive investment and create short-term financial vulnerabilities.”
Growth drivers
Aslam, a prominent economist and financial analyst known for his work on economic policy, shed light on economic growth drivers and said the country’s GDP is likely to reach 4.1 per cent by next financial year compared to 2.6 per cent recorded in 2024-25.
Remittances as structural support: As a consumption-oriented economy, Pakistan’s short-term growth trajectory is closely linked to the strength and stability of remittance inflows. Worker remittances remain the single most powerful catalyst of economic activity, sustaining domestic demand and stabilising external accounts. Overseas Pakistani remittances are over $30 billion annually.
Public sector spending and household consumption continue to drive GDP growth, particularly through government development programmes and service-sector activity by injecting demand into construction, infrastructure, and allied industries. This has a significant employment multiplier effect.
Services sector: IT exports, though still small, are growing at 20–30 per cent per year. The freelance economy, digital services, and tech startups are adding a new layer of growth that old metrics undercount.
Monetary easing: The SBP cutting rates from a peak of 22 per cent provides relief to businesses and triggers a credit cycle. As borrowing becomes affordable, private investment will follow.
Consumption recovery: As inflation falls and real wages recover, domestic consumption, which is roughly 80 per cent of Pakistan’s GDP, is rebounding. This is the single largest driver of near-term growth.
Gradual Recovery
Dr Qais Aslam, Professor of Economics and former Chairman, Department of Economics, GC University, Lahore, said Pakistan economy is gradually recovering but geopolitical tension in the region and looming energy crisis may derail the progress.
In 2023, Pakistan’s GDP grew by -0.5 per cent at interest rates of 22 per cent, and in 2024 rose by 2.5 per cent or an increase of three per cent at interest rates of 13 per cent, than increasing to 2.7-3.7 per cent (average 3.2 per cent) in 2025 or an increase of 0.2-1.2 per cent (average increase of 0.7-1 per cent) at interest rates of 10.5 per cent.
“As interest rates are coming down, the recovery in GDP going up. But this is a very slow recovery in face of above 2.5 per cent population growth rare when GDP should grow by five per cent and interest rates should be in single digit. Now, if the interest rates remain constant than the added incentive to invest will not be there and in 2026 the economy should grow by 3-3.7 per cent,” Dr Qais told Khaleej Times.
But now there is a war in Iran and the oil and gas supply is disrupted. Pakistan is an energy deficint country that is going to increase energy costs, transport costs and would spiral in increase in cost of living as well as increase in cost of doing business.
“With China Pakistan has a trade deficit of almost $15 billion, very little trade with Iran, state of war with Afghanistan closing cross border trade and nil trade with India, meaning that Pakistan only external trade would be through Karachi and the volatile Indian ocean,” he said.
Key sectors performance
Dr Qais further noticed that inflation rates have increased to 5.6 per cent in January 2026 and are reported to have gone up to seven per cent this month.
“State of the economy is that agriculture growth rate in 2025 was 0.56 per cent in 2025 and projected to get better provided there are no floods due to climate change or Indian water aggression, and the farmer gets their proper price in 2026, although energy costs might hit agriculture output also. Anyway, farming only contributed eight per cent to GDP, the rest came from animal husbandry and dairy farming.
“Large scale industry grew by six per cent in 2025-26, but unemployment remained high and SMEs are suffering, exports are stagnant.”
Dr Qais said Pakistan growth comes from services sector and contributed 54 per cent to the country’s GDP led by financial sector, energy sector (IPPs), universities, doctors, lawyer and other service providers and eateries etc while pharmaceutical industry has also grown because of rising prices of medicines in Pakistan.
“Governments have always supported the financial sector, the other service sectors, the pharma industry, the IPPs, the textile industry at the cost of the overall economy, lack of diversified industry and lack of skilled youth as labour force or managers.”
In conclusion, other things remaining constant, the economy should grow by four per cent, but the war and energy crisis will hit the economy hard and would increase our public debt, inflation and decrease growth substantially, according to Dr Qais.
“The immediate challenge to Pakistan economic growth is the war in Iran that is going to choke our energy needs through the Arabian Gulf, therefore either we need to innovate and depend on our internal sources, or open land routes with Iran,” he said.
Apart from the war in Iran and our conflict with Afghanistan and bad relations with India that does not allow Pakistan economic gains to translate into social gains, the policy of the government has to gear towards pro people, pro economic approach.
Reforms needed
Dr Qais said the government refs serious administrative reforms towards small but efficient governance. Needs to reform the education system with a 21-century approach for sustainable youth both as labor as well as managers and entrepreneurs.
“There is a need for land reforms and an effective water conservation policy for sustainable agriculture and food security. Population and terrorism cannot be controlled without mitigating poverty through viable industrial policy that carers labour intensity on one hand and technology intensive on the other hand.
“Competition and free market is the name of the game today. Bureocratic hurdles should be removed at all levels except policy level for enhanced growth with interest rates coming down to eight per cent and more. Let us cater for employment at cost of inflation. Higher income level can take care of inflation.
He said diversification of industry through international joint ventures is important for technology and know-how transfers. “All this can be accomplished only with long term and medium-term policy measures,” Dr Qais concluded.
