KARACHI: Pakistan’s economy is expected to grow 3.7% in the fiscal year ending June 2027, matching last year’s pace, the Asian Development Bank said on Wednesday, warning that the war involving the United States and Iran and the wider Middle East could worsen inflation.

The conflict began with US and Israeli strikes on Iran in February and has disrupted oil shipments through the Strait of Hormuz, a major export route for Gulf producers. The resulting pressure on fuel supplies and prices has reached countries far beyond the fighting, including Pakistan. 

Pakistan must pay for imported fuel, while many of its citizens work in Gulf states and send earnings home. More expensive oil strains the country’s finances and raises domestic costs. A wider conflict could also affect Gulf jobs and the money those workers send to their families.

“An escalation of the Middle East conflict could increase energy import costs, intensify inflation, and disrupt labor markets in Gulf economies, affecting workers’ remittances,” the bank said in its September economic outlook.

The ADB forecast average inflation of 8.3% in the current fiscal year, up from 7.1% in the year ended June and above the Pakistani central bank’s medium-term target of 5% to 7%. Higher energy prices can also raise the cost of transporting goods and producing food, the bank said.

Pakistan’s economy grew 3.7% last fiscal year, up from 3.2% a year earlier, supported by services, manufacturing and stronger private investment. Floods damaged major crops, while the Middle East conflict slowed economic activity in the final quarter, according to the ADB.

The country is pursuing tax, energy and state enterprise reforms under a $7 billion International Monetary Fund program introduced to stabilize its finances after a prolonged economic crisis. The ADB said larger foreign exchange reserves, improved credit ratings and renewed access to international bond markets should help sustain investor confidence, although the war’s effects could prevent faster growth.

“Maintaining reform momentum will be critical to unlock higher private investment, strengthen resilience to external shocks, and achieve stronger and more inclusive growth,” ADB Country Director for Pakistan Emma Fan said in the release.

The bank also identified weaker tax receipts, further weather-related crop damage, delays to economic reforms and government spending cuts as risks to its forecast.