The Asian Development Bank (ADB) Wednesday forecasts Pakistan’s economic growth to slow down to 3.5% in fiscal year (FY) 2023 amid devastating floods, policy tightening, and critical efforts to tackle sizable fiscal and external imbalances, the international lender said in a report.

In its Asian Development Outlook (ADO) 2022 Update, the ADB said GDP growth in Pakistan in FY2022 was led by higher private consumption and growth in agriculture, services, and industry—particularly large-scale manufacturing.

"But in FY2023—as well as climate headwinds and Pakistan’s critical policy efforts—ADB’s lower growth projection also reflects double-digit inflation," it said.

“The recent devastating floods in Pakistan add profound risk to the country’s economic outlook,” ADB Country Director for Pakistan Yong Ye was quoted as saying.

“We hope flood-related reconstruction and economic reforms will catalyze significant international financial support, stimulate growth, and preserve social and development spending to protect the vulnerable.”

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The development comes as record monsoon rains in south and southwest Pakistan and glacial melt in northern areas triggered flooding that has impacted nearly 33 million people in the South Asian nation of 220 million, sweeping away homes, crops, bridges, roads and livestock in damages estimated at $30 billion.

Meanwhile, the ADB said economic outlook will be shaped largely by the restoration of political stability and the continued implementation of reforms under the revived International Monetary Fund (IMF) program.

As per the latest update, private consumption in Pakistan expanded by 10% in FY2022 resulting in improved employment conditions and higher household incomes.

Moreover, the agriculture output increased by 4.4% in FY2022, on the back of strong performances in crops and livestock. “Agriculture growth is expected to moderate due to flood damage and high input costs next year, which may diminish services growth, particularly wholesale and retail trade,” said the report.

The ADB was of the view that fiscal adjustments and monetary tightening are expected to suppress domestic demand in the ongoing fiscal year. “A contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s depreciation, will reduce industry output,” it said.

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Moreover, inflation has risen sharply in the fourth quarter (April–June) of FY2022, spurred by the removal of fuel and electricity subsidies, a significant depreciation in the rupee, and the surge in international commodity prices.

“Inflationary pressures will remain high in FY2023 with inflation forecast to rise to 18%,” it said.

“In addition to the floods, the elevated inflation rate along with possible fiscal slippages as general elections approach, and a higher-than-projected increase in global food and energy prices, remain downside risks to the outlook.”

On Tuesday, the ADB also announced that it is working on a relief package for Pakistan, currently battling devastation caused by unprecedented floods.