ISLAMABAD: The World Bank has warned that Pakistan’s economic growth could remain insufficient to generate adequate jobs and improve per capita income, recommending that the country must move beyond macroeconomic stabilisation and undertake far-reaching structural reforms to achieve faster, sustained growth, improve household incomes and create productive employment.
In its latest Pakistan Development Update, titled “Attaining Escape Velocity”, the World Bank projected economic growth at 3.8 percent for fiscal year 2027. The Bank has projected growth to reach only 4.5 percent by fiscal year 2031 under the baseline scenario, while structural reforms could lift it above 6 percent.
Pakistan had achieved important macroeconomic gains in fiscal year 2026, but rising poverty, inadequate job creation and weak productivity continued to undermine the country’s economic prospects. Without sustained reforms, the report warned, Pakistan’s growth trajectory would remain inadequate to generate sufficient productive employment, reduce poverty and achieve meaningful convergence with upper-middle-income economies.
The Bank cautioned that prolonged conflict in the Middle East, higher energy prices, adverse weather conditions associated with El Niño, tighter external financing and fiscal slippages could undermine the economic outlook.
The report revealed that Pakistan’s poverty rate increased from 22 percent in 2018-19 to 29 percent in 2024-25, reflecting declining real labour incomes amid high inflation and sluggish productivity growth.
It noted that approximately 3.6 million people reach working age every year, while one in six new labour market entrants has been left without work since 2018. Although the economy generated 17.7 million net new jobs during this period, most were concentrated in low-paying, low-productivity sectors.
Unemployment stood at 7 percent in 2024, with women and young people disproportionately affected, while annual labour productivity growth averaged only 0.4 percent during 2014-24, and inflation is projected to remain elevated at 8.2 percent in FY27 despite economic growth accelerating to 3.7 percent in FY26.
The report projected growth to reach only around 4.5 percent by FY31 under the baseline scenario. However, closing half the policy and institutional gap with the average upper-middle-income economy could raise sustained annual growth to 6.2-6.9 percent and enable Pakistan to reach Viet Nam’s current income level by 2050.
The World Bank said Pakistan had made significant progress in restoring macroeconomic stability, but real per capita income growth remained stuck at around 1.6 percent, underscoring the need to translate economic gains into higher living standards.
“Pakistan has made real progress in restoring stability, and markets have taken notice,” said Bolormaa Amgaabazar, World Bank Country Director for Pakistan, adding that reforms to drive faster growth were now urgently needed.
The report highlighted a widening gap between labour market entrants and employment opportunities. Around 3.6 million people reach working age every year, while approximately one in six new labour market entrants has been left without work since 2018.
Although Pakistan generated 17.7 million net new jobs between 2018 and 2024, most were concentrated in low-paying, low-productivity sectors. Women and young people were disproportionately affected by unemployment, while labour productivity grew by an average of only 0.4 percent annually during 2014-24.
Declining real labour incomes, persistently high inflation and sluggish productivity growth contributed to the increase in poverty, the Bank said.
External vulnerabilities remained significant. The goods trade deficit widened to USD 33.7 billion in FY26 as exports fell 4.7 percent to USD 30.8 billion and imports rose 9 percent to USD 64.5 billion.
Remittances increased 8.6 percent to USD 41.6 billion, helping contain the current account deficit at 0.1 percent of GDP. Net foreign direct investment, however, nearly halved to USD 1.3 billion, equivalent to just 0.3 percent of GDP, highlighting the need to attract greater private capital.
The World Bank called for comprehensive reforms to strengthen the business environment, broaden the tax base, liberalise trade, improve access to finance and reduce the state’s presence in the economy.
It estimated that a revenue shortfall or spending overrun equivalent to 1 percent of GDP could push public debt around four percentage points above the baseline trajectory.
The World Bank urged Pakistan to maintain fiscal discipline, build foreign exchange buffers, avoid inefficient energy subsidies and prepare and implement a medium-term fiscal plan before the IMF programme ends in September 2027.
It stressed that sustained reforms, stronger private investment and improved productivity would be essential to translate macroeconomic stability into faster growth, higher incomes, productive employment and lasting poverty reduction.
The report stressed that maintaining macroeconomic stability alone would not be sufficient to achieve sustainable and inclusive growth. Pakistan would need to implement wide-ranging structural reforms covering energy, taxation, trade, investment, public services and financial markets.
Among its recommendations, the World Bank called for energy sector reforms, a broader revenue base, implementation of a modern Investment Act, a new National Finance Commission Award, a flexible exchange rate, trade liberalisation and greater private sector participation in state-owned enterprises.
It also recommended strengthening export financing, developing domestic bond and capital markets, and increasing private investment in health and education.
The Bank urged Pakistan to preserve fiscal discipline, build foreign exchange buffers, avoid inefficient energy subsidies and publish and implement a medium-term fiscal plan before the IMF programme ends in September 2027.
“With macro stabilisation achieved but fiscal resources and foreign exchange still tightly constrained, structural reform to encourage private investment is the necessary next step towards higher living standards” said Sebastian Essl, lead author of the report. “Achieving this kind of private-sector led growth requires a plan, coordination, and committed reform implementation.”
The report highlights a set of ambitious reforms that could help Pakistan reach, by 2050, the per capita incomes of countries currently at the upper-middle income threshold. Many of these build on measures already under way, including timely power sector tariff adjustments that helped cut energy subsidies from 1.1 percent of GDP in FY25 to 0.8 percent in FY26, continued implementation of trade liberalisation under the National Tariff Policy, and the recent privatisation of Pakistan International Airlines. Building on these foundations, sustained progress will depend on continued reforms to strengthen the business environment, reform the tax system, reduce the state’s presence in the economy, and expand access to finance.
Replying to a question the Bank officials termed the State Bank of Pakistan’s policy for procuring dollars as legitimate for boosting reserves. However, the Bank urged Pakistan to reform and expand taxation on the agricultural income and real estate/property sectors, noting that both heavily contribute to the economy while remaining largely outside the effective tax net, observing issues with implementation.
Copyright Business Recorder, 2026