As Pakistan gears up to unveil its federal budget for FY2025–26, a familiar tension looms over the fiscal strategy: Should the government tighten its belt to appease the International Monetary Fund (IMF), or provide measures to jumpstart the economy?
The decision isn’t binary – but the balancing act is perilous.
IMF strings vs political stakes
With a new IMF program likely in negotiation, the Fund’s prescriptions will weigh heavily on Islamabad’s budgetary choices. These include reducing the fiscal deficit, expanding the tax base, and phasing out untargeted subsidies –particularly in the energy and fuel sectors.
Yet, the political stakes are equally high. The coalition government, barely months into its tenure, faces mounting public pressure amid record inflation, declining purchasing power, and limited employment opportunities. The budget may become the government’s first major test in managing economic pain with political prudence.
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The case for austerity
Pakistan’s fiscal deficit hovered around 7.4% of GDP last year. With external financing requirements ballooning and reserves perpetually strained, fiscal consolidation is essential to restore macroeconomic credibility.
Expect cuts in development spending (PSDP), a potential hike in GST or petroleum levies, and tighter limits on government borrowing. Austerity, the argument goes, is the price of credibility – especially for global markets and creditors.
The case for stimulus
Yet, austerity can’t be the only response to stagnation. Pakistan’s GDP growth rate is projected at under 3%, with private investment and consumption subdued. Businesses are already contending with high borrowing costs, low demand, and import restrictions.
Targeted stimulus – such as tax relief for exporters, energy support for SMEs, or subsidized credit for agriculture – could provide much-needed lifelines. Critics of austerity argue that cutting too deep, too soon could choke off even the fragile recovery underway.
Where is the middle path?
The optimal policy may lie somewhere in between: A fiscal plan that reins in wasteful spending while still prioritizing productivity-enhancing investments.
Digital tax enforcement, public-private partnerships, and social safety nets like BISP could serve as bridges between discipline and development.
The FY2025–26 budget isn’t just about numbers – it’s about signaling. A signal to markets that reforms are real. A signal to citizens that recovery is possible – and a signal to investors that Pakistan remains open for business.
The question is not just what the government can afford – but what it can afford to ignore.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is Features Editor at Business Recorder
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