Pakistan’s economy grew by 3.7% in fiscal year 2025-26, but rising energy and food prices pushed average inflation to 7.1%, highlighting the challenge of sustaining economic recovery while protecting household purchasing power.
According to the World Bank’s October 2026 economic outlook, Pakistan’s growth rate improved from 3.2% in the previous fiscal year. However, inflation accelerated during the second half of FY26 as international energy costs increased and domestic food prices came under renewed pressure.
The World Bank projects economic growth of 3.8% in FY2026-27, while average inflation is expected to rise to 8.2%. The outlook suggests that although economic activity is expanding, higher living costs and external economic risks could complicate the recovery.
The figures are included in the World Bank’s October 2026 Macro Poverty Outlook for Pakistan.
Services Lead Pakistan’s Economic Growth
The services sector grew by 4.1% in FY26, making it the strongest-performing sector among those highlighted in the report. Agriculture expanded by 2.9%, supported in part by livestock.
The World Bank’s assessment indicates that Pakistan maintained positive economic growth despite uncertainty in international markets and the impact of higher energy prices.
However, growth alone does not necessarily translate into stronger living standards. The pace of job creation, wage growth and changes in household purchasing power will influence how much ordinary citizens benefit from the recovery.
The World Bank has also highlighted longer-term concerns over employment and productivity. Its Pakistan country overview notes that the economy needs stronger job creation and productivity growth to generate better employment opportunities for the country’s expanding workforce.
Inflation Accelerates in the Second Half of FY26
Inflationary pressure increased significantly between March and June 2026, according to the figures in the supplied report.
Average headline inflation stood at around 5.5% from July 2025 to February 2026 before rising to an average of 10.2% between March and June. Inflation peaked at 11.7% in May.
Higher international energy prices following the conflict in the Middle East contributed to the increase. Rising wheat and perishable food prices, along with the pass-through of fuel costs into transport and other goods and services, added to pressure on consumers.
Food inflation averaged 4.3% in urban areas and 5.4% in rural areas during FY26. The increase followed an earlier period of moderation and came amid supply disruptions associated with flooding.
Energy prices also climbed sharply between February and June. Petrol prices increased by approximately 36%, high-speed diesel by 31% and liquefied petroleum gas (LPG) by 46%, according to the reported figures. Transport fares rose by around 30% over the same period.
These increases affected both urban and rural households, while higher transport costs created additional pressure on the prices of goods and services.
Core Inflation and Interest Rates Remain in Focus
Core inflation, which excludes food and energy prices, averaged 7.4% in urban areas and 8.5% in rural areas during FY26.
Urban core inflation reached 9% in May, indicating that price pressures were extending beyond direct increases in food and fuel costs. Transport expenses and other operating costs can feed into the prices consumers pay for a range of goods and services.
The State Bank of Pakistan raised its policy rate to 11.5% in April 2026 as inflation conditions changed, according to the World Bank’s assessment.
Interest-rate decisions affect borrowing costs across the economy, including financing for businesses and households. Monetary policy also influences demand and inflation expectations, although its effects generally take time to filter through to consumer prices and economic activity.
Credit Ratings and International Borrowing Improve
Pakistan also recorded developments in international financing during FY26. The World Bank noted that S&P and Moody’s upgraded the country’s credit ratings, while Pakistan returned to international debt markets with a $3 billion Eurobond issuance in September 2026.
Foreign exchange reserves were reported at $19.7 billion in the figures supplied for this report. The fiscal deficit narrowed to 2.6% of gross domestic product (GDP), another indicator of the improvement in the country’s fiscal position.
These developments point to improved access to international financing and progress in fiscal consolidation. However, borrowing provides financing rather than eliminating the underlying need to manage debt repayments, foreign currency requirements and economic vulnerabilities.
World Bank Expects Growth to Reach 3.8% in FY27
For the current fiscal year, the World Bank expects Pakistan’s economy to grow by 3.8%, with average inflation projected at 8.2%.
The outlook remains exposed to risks, including prolonged conflict in the Middle East, elevated commodity prices and pressure on fiscal and external balances. Higher energy costs could also complicate efforts to keep inflation under control.
Pakistan’s economic performance will therefore depend not only on maintaining growth but also on creating jobs, improving productivity and managing price pressures. The latest projections point to continued expansion, but the benefits of that growth will depend on whether incomes and employment opportunities improve alongside economic activity.
