World Bank lowers Pakistan growth forecast to 3% amid Middle East war

ISLAMABAD: The World Bank has reduced Pakistan’s economic growth forecast for the current fiscal year to 3%, citing the fallout from the war in the Middle East, according to its latest regional economic update released on Thursday.

In its first detailed assessment of the conflict’s economic implications, the Washington-based lender said Pakistan could also face a wider current account deficit of 1.2% of gross domestic product, or $4.9 billion, during this fiscal year. That projection is nearly $3 billion above the $2 billion estimate the government shared with the International Monetary Fund last month.

The World Bank’s report covered the Middle East, North Africa, Afghanistan and Pakistan region, which it said is being affected by conflict, humanitarian suffering and broader economic consequences. It lowered Pakistan’s growth outlook by 0.4 percentage points, bringing it down to 3%, a level close to last year’s growth rate.

Pakistan has recently been grouped with the Middle East region rather than South Asia by the World Bank. The findings were based on a one-month assessment of the war that began on February 28.

Earlier this month, the federal government told the IMF that it expected GDP growth to remain in the 4% to 4.5% range in fiscal year 2025-26, supported by momentum in the automobile, construction and garment sectors. Pakistan reflected the adverse effects of the war in projections for the following fiscal year and informed the IMF that growth in fiscal year 2026-27 was expected to stay at a similar level as higher fuel prices and weaker external demand weigh on the recovery.

According to the World Bank, Pakistan’s GDP per capita is expected to rise by 1.4% this fiscal year, also near last year’s level. Inflation is projected at 7.4%, which remains within the target range set by the federal government and the State Bank of Pakistan.

The lender warned that if oil, natural gas and related energy prices stay high for a prolonged period, inflationary effects would spread through several channels. The pressure is already more visible in Europe and Asia than in the United States. It also said higher fertiliser prices could affect future crop yields and eventually push food prices upward, while inflationary pressure may force central banks to keep interest rates elevated for longer than previously expected.

Pakistan, along with Egypt and Jordan, faces indirect but potentially significant negative spillovers through higher hydrocarbon prices, energy shortages, and lower remittances from the Gulf as well as weaker tourism.

Compared with a current account surplus of 0.5% of GDP in the last fiscal year, Pakistan could post a deficit of 1.2% of GDP, equal to $4.9 billion, the World Bank said. It attributed the deterioration mainly to lower projected remittances and a higher energy import bill.

The report also showed that Pakistan’s sovereign bond spread over US five-year bond yields rose from 3.9% to more than 5% within a month because of the war’s implications. The budget deficit may widen to 4.3% of GDP, above target but lower than last fiscal year, helped by increased central bank profits and petroleum levy collections exceeding budget assumptions.

On global energy markets, the World Bank said oil entered the conflict period with oversupply that could cushion price pressures. Still, as of March 27, Brent crude was priced at $112 per barrel, nearly 60% higher than before the conflict began. Oil futures suggest some optimism, with end-of-year delivery prices trading at about $85 per barrel.

The lender also sharply lowered its broader regional growth outlook. In January 2026, it had projected growth in the wider region at 4.2%, but it now expects 1.8%. For Gulf Cooperation Council countries, the forecast has been cut to 1.3% from 4.4%.

On Afghanistan, the World Bank said the country’s economy was hit by major external shocks in 2025, including steep cuts in foreign aid, prolonged border closures with Pakistan, drought, earthquakes, and large-scale refugee returns from Iran and Pakistan. These developments led to an estimated 11% population increase in FY2025, largely due to net migration.

Tensions between Afghanistan and Pakistan have been rising. Despite that, Afghanistan’s economy is projected to grow by 4% in 2026, supported by stronger demand, higher private investment and improved absorption of returnees into the labour market.