ISLAMABAD: Pakistan’s fragile economic stabilization is at risk from fresh floods that threaten to undo hard-won gains, the World Bank said in its Pakistan Development Update released this week, warning that growth will slow to 3 percent in FY 2026 and inflation will rise to 7.2 percent.

After a year of recovery marked by a sharp decline in inflation to 4.5 percent, a record primary surplus of 2.4 percent of GDP, and the first current-account surplus in two decades, the Bank cautioned that such growth was “insufficient to materially improve living standards,” particularly amid job market pressures.

The improvements reflect reforms under Pakistan’s $7 billion IMF Extended Fund Facility, which has helped narrow fiscal and external deficits through tighter policy and a market-based exchange rate.

“Recent floods threaten these gains, cutting projected growth to 3 percent in FY 2026 and raising inflation to 7.2 percent, which is insufficient for jobs and living standards,” the World Bank said in its report titled ‘Staying the Course for Growth and Jobs.’

The report said Pakistan’s labor force continues to expand by around 1.6 million workers each year, while limited private investment and weak productivity growth prevent the economy from creating enough jobs.

Exports remain another major constraint, accounting for only 10 percent of GDP — roughly half Bangladesh’s share — highlighting Pakistan’s low participation in global value chains. The Bank said high tariffs, complex customs procedures and standards compliance costs continue to “raise trade costs and reduce competitiveness.”

The World Bank backed Pakistan’s ongoing tariff reform plan, which aims to halve import duties by 2030 and, if fully implemented, could raise exports by 14 percent, increase GDP by 0.2 percent, and create about 300,000 jobs.

It called on Pakistan to sustain reforms that have restored short-term stability, including maintaining a market-determined exchange rate, broadening the tax base, improving customs efficiency, and advancing privatization to crowd in private investment.

“Staying the course on structural reforms will be critical to consolidate stability and generate the growth and jobs needed to lift living standards,” the report said.