Budgetary targets for FY2026-27

The budget formulation process at the federal level is underway in the Ministry of Finance. The budget will be presented in the first half of June 2026.

There is now a considerable degree of uncertainty about the evolution of key macroeconomic magnitudes in Pakistan in the last quarter of 2025-26 and in 2026-27. This is primarily due to the disruptions in oil supply due to the Middle East war and the closing in particular of the Strait of Hormuz.

The primary manifestation of the uncertainty is in the evolution of the price of oil. It was close to USD 70 per barrel of Brent Crude in the days before the onset of the war. It reached a peak of USD 110 per barrel in the first week of April. Following the ceasefire, it is currently operating at USD 105 per barrel.

The concern is not only with a rise in price already of 50 percent but the likelihood of severe shortage of petroleum products and crude oil if the Strait of Hormuz remains closed.

There is already a severe cutback in the import of LNG and LPG in March. This has led to power load-shedding. Also, the availability of fertilizer will be severely limited in the forthcoming Kharif Season.

Given these developments, it is essential that budgetary targets for 2026-27 are set with the provision for worse outcomes. For example, the reduction in petroleum levy on motor spirit is likely already to imply an annual revenue loss of over Rs 400 billion.

There have been ongoing negotiations between Pakistan and the IMF staff on the third review of the ongoing IMF Programme. This includes the agreement on projections for 2026-27 of the economy, with the setting thereof of quantitative performance criteria for subsequent program reviews.

The IMF’s recent publication of the World Economic Outlook contains projections for Pakistan in 2026-27. The economy is expected to achieve a GDP growth rate of 3.6 percent, with the rate of inflation at 7.2 percent.

The earlier projections at the end of the second review of the IMF Programme for 2026-27 were of a GDP growth rate of 4.1 percent and the rate of inflation at 7.0 percent. Therefore, despite the large negative shock of the Middle East war, the IMF expects only a small impact on the economy of Pakistan of a 0.5 percent point reduction in the GDP growth rate and a 0.2 percent point increase in the rate of inflation.

This degree of relative optimism of the IMF appears to have been acceptable to the Ministry of Finance. Therefore, the budgetary targets and the balance of payments have been projected in this scenario, which imply a very little loss of momentum in the Pakistan economy due to negative impacts of the Middle East war.

The first critical magnitude with which the budgetary projections and targets have been set is the level of FBR revenues. Apparently, the target for FBR revenues in 2026-27 is Rs 15,564 billion. The earlier target set after the second review was Rs 15,712 billion. Therefore, the target has been reduced by only Rs 148 billion, equivalent to a reduction of only 1 percent.

There has already been a significant shortfall in FBR tax collections in 2025-26 of over Rs 600 billion. The month of March saw an increase in revenue of only 6 percent. Therefore, the likelihood is that by the end of 2025-26, the shortfall will approach Rs 900 billion. This implies that the outcome in 2025-26 of FBR revenues will be close to Rs 13,080 billion.

The implication is that with the target at Rs 15,564 billion for 2026-27, the anticipated growth rate in FBR revenues is 19 percent. This will imply a rise in the tax-to-GDP ratio of as much as 1.1 percent of the GDP.

The emergence already of power load-shedding due to shortages of gas and the likelihood of a big shortage of fertilizer for the next crop, it is more likely now that the economy will have a GDP growth rate of below 2.5 percent, with the rate of inflation approaching a double-digit rate. Already, the year-to-year SPI has shown an increase of over 12 percent in Mid-April.

There is no doubt that the FBR revenue target growth rate of 19 percent in 2026-27 is unrealistic. Therefore, prior to the finalization of the third review, this target needs to be revised downwards by almost Rs 750 billion. This will imply a target growth rate of 13.2 percent, which is still higher than the likely growth rate in 2025-26.

There are apparently other budgetary targets, which are also ambitious, especially in light of the uncertainty about the size of the negative impact of the Middle East war.

The expectation is of a primary budget surplus in 2026-27 of Rs 2,812 billion, equivalent to 2 percent of the projected GDP. This will hinge not only on FBR revenues but on the level of debt servicing. The latter cost could increase if there is a rise in interest rates, in response to the higher rate of inflation and larger current account deficit in 2026-27.

The bottom line is apparently an overall budget deficit of close to 3.9 percent of the GDP. Given the likely state of economy in 2026-27, this is also an ambitious target. A more realistic target would have been close to 4.5 percent of the GDP. This higher target reflects the likely big reduction in SBP profits and a shortfall in generation of a big cash surplus of Rs 1,650 billion by the provincial governments in 2026-27.

Overall, there is need for exercising great caution in the setting of budgetary and other targets for 2026-27. The IMF has displayed a perhaps unrealistic optimism in assessing the impact of the Middle East war on the economy of Pakistan.

Copyright Business Recorder, 2026