ADB warns of risks from policy slippage, climate change

ISLAMABAD: The Asian Development Bank (ADB) has maintained Pakistan’s growth forecast for the current year at three per cent, while revising its inflation forecast upwards to 6pc, citing the impact of recent floods on agriculture and infrastructure.

In its Asian Development Outlook (ADO-September 2025), the Manila-based lender flagged policy slippage and climate change as key risks that could threaten Pakistan’s economic stability. “Pakistan’s economic outlook faces several downside risks that could adversely affect growth and macroeconomic stability. Key domestic risks stem from policy slippage and climate change,” the report noted.

The ADB had initially projected a 3pc growth rate for Pakistan in April and retained the estimate, though it increased its inflation forecast from 5.8pc to 6pc. While the country was expected to see a boost in economic activity due to a reduction in debt risks and improved business confidence following a recent US-Pakistan trade agreement, the extensive damage caused by floods could limit overall growth.

Maintains growth forecast at 3pc, but raises inflation to 6pc amid flood damages

The floods have caused significant damage to infrastructure and farmland, with the ADB warning that these losses may slow down recovery. However, it remains hopeful that fiscal incentives for construction, announced in the FY26 budget, will help mitigate some of the negative effects.

“Investment is expected to strengthen domestic demand, assuming continued structural reform and sound macroeconomic policies,” the report said. The ADB also anticipates that investment will rise as business confidence improves, aided by declining interest rates and fiscal consolidation.

Key risks and concerns

On the downside, the ADB highlighted concerns over the potential failure to meet revenue and fiscal consolidation targets. “Policy slippage could weaken business confidence, raise borrowing costs, and increase external financing risks,” the report stated. It also warned that Pakistan’s vulnerability to extreme weather, such as floods, could reverse the decline in food price inflation, disrupt economic activity, and strain household incomes.

Geopolitical risks, particularly uncertainties surrounding international economic policies, were also flagged as threats to inflation, external stability, and business confidence. However, the ADB noted that faster implementation of reforms and a more favourable external environment could enhance investor confidence and push growth beyond current expectations.

Published in Brackly News, October 1st, 2025