The Lahore School of Economics has released its latest quarterly assessment for Financial Year 2025-26, revealing that Pakistan's economic growth currently stands at 3.1% but faces significant downward pressure from a global energy shock. The report, authored by economists Dr Moazam Mahmood and Dr Azam Amjad Chaudhry, warns that growth could be revised down to 2.8% once final data for the fiscal year is complete, a level the economists describe as a 'force majeure' growth rate.
Growth Estimates Below Government and International Projections
The Modelling Lab's 3.1% GDP growth estimate is lower than the government's projection of 3.7%, as well as the International Monetary Fund's (IMF) 3.6% and the Asian Development Bank's (ADB) 3.5%. Both the IMF and ADB made their projections before the full impact of the energy shock materialized. The World Bank's comparable estimate of 3.0% is closest to the Lahore School's figure.
Energy Crisis Driving Economic Woes
The primary culprit behind the economic slowdown is the surge in global oil prices. Pakistan imports half a million barrels of oil per day, spending approximately $13 billion annually on oil imports alone. In recent months, global oil prices have been $25 to $30 per barrel above their long-term trend, adding roughly $1 billion to the country's import bill in a single quarter. This has pushed the current account back into deficit, with imports reaching $7.6 billion in April alone, while exports average only $3.5 billion per month. The report states bluntly: 'The economy cannot grow without affordable energy.'
Inflation Surges to 9% Driven by Energy Prices
Inflation for FY2025-26 is estimated at 9%, up from 8% last year and well above the government's estimate of just under 6%. Energy prices are the primary driver. Between June 2025 and June 2026, petrol prices rose 54%, kerosene by 85%, high-speed diesel by 53%, electricity by 25%, and natural gas by a staggering 126%. The report calculates that these energy price increases have contributed 4.6 percentage points to the overall inflation rate, roughly half of the total. Notably, about two-thirds of the increase in consumer energy prices came from government taxation, making the state directly responsible for approximately one-third of the inflation rate.
Bright Spots in Agriculture and Manufacturing
Despite the challenges, there are some positive developments. Agricultural growth is approaching 3% after two difficult years, partly due to the government reinstating the wheat support price, a policy it had previously abandoned to damaging effect. Large-scale manufacturing has shown an unexpected surge, reaching 6% growth in recent quarters, driven largely by the automotive sector. Services growth has climbed to 3.7%. However, the report cautions: 'One swallow does not a summer make.'
Extreme Poverty on the Rise
The most alarming section of the report deals with poverty. Data from household surveys shows that extreme caloric poverty, measured against the World Bank's threshold, rose from 16.5% in FY2018-19 to 21.1% by FY2024-25 – a five percentage point jump in five years, reversing nearly two decades of progress. The report links this directly to low GDP growth and high inflation, themselves products of two major currency depreciations: 25% in 2018-19 and 40% in 2022-23.
Government Efforts and Challenges Ahead
The report credits the current government for reining in the depreciation cycle and bringing double-digit inflation down from its peak. Managing the exchange rate under global commodity pressure, the economists acknowledge, has been no small feat. However, the credit comes with a clear challenge: stabilising the rupee is necessary but not sufficient. With 21% of Pakistanis unable to meet basic caloric needs, the government must now urgently turn its attention to reviving growth, not just defending it.
