Pakistan’s vision amidst FY26 Budget

Pakistan’s annual budget has traditionally been more of a routine fiscal exercise conducted every year, covering only one year, voted every year, and executed over one year, rather than a fully strategic, long-term development plan focused on sustained growth in economic and social sectors with focus on poverty reduction and being independent of IMF crutches.

There were days when the Planning Commission of Pakistan was a mighty supervisory body preparing a well-researched five-year ‘Development Plan with Vision’ on government’s commitment to education, health, infrastructure, job creation and above all poverty reduction. The annual budget in those times consistently aligned itself with the country’s vision and government’s commitment to public well-being.

In recent times, however, the annual budget rarely aligns itself with those strategic visions. Investment in education, health, poverty reduction, infrastructure, and job creation falls short, especially under IMF-mandated austerity.

The budget 2025-26 is no different from the past routine except that the incumbent Finance Minister, Muhammad Aurangzeb, in his second Budget presentation, has brought around professionalism and discipline in the otherwise chaotic fiscal and economic dynamics of the country. With political expediency, along with persistent IMF dictates, ruling the roost, this is the best the Finance Minister could have achieved.

To expect something profound coming out the budget demands drastic actions on ground like cuts in government expenditure starting from the self-fixed and out of proportion financial privileges of our legislators and state functionaries, bringing the untaxed sectors like agriculture into the tax net, arresting the losses emerging out of loss-making public sector enterprises, radical reforms to achieve growth in the agricultural and industrial sector of the country. The political hierarchy is not ready for it - although all of it is doable for the good of the country and its people.

The announced budget and IMF-driven conditions appear effective in restoring macroeconomic stability. However, they fall short in translating fiscal discipline into meaningful growth, poverty reduction, and sustainable economic transformation. Without deeper structural reforms, especially in growth, taxation, infrastructure, agriculture, and industrial policy these weaknesses may persist for a long time to come.

Critics have widely spoken and written on taxation and tariffs’ imbalances. These cosmetic taxation trade-offs benefiting one segment and depriving the other will not change the destiny of the people of the country. There are far bigger and serious issues which challenge the fiscal, economic and social sovereignty of the country. The budget, understandably, is silent on how to address them — as there are no ready answers for it.

The budget has come up with a very ambitious GDP growth target of 4.2 percent growth — without presenting the mechanism to achieve it. This target seems detached from reality — the country’s economy is likely to grow 2.7 percent in the fiscal year ending June 2025. The IMF expects GDP to grow by 2.6pc in FY25 and for the economy to grow 3.6 percent in FY26.

With fiscal austerity over-riding stimulus, a 7 percent reduction in overall spending and cuts in capital outlay, the budget emphasises deficit reduction rather than growth-driving investments. Despite tax incentives, there is no coherent strategy to revive agriculture and large-scale manufacturing—sectors vital for employment and exports.

Foreign Direct Investment (FDI) is the prime-mover of growth. The government had channeled funds into the Board of Investment (BOI) and Special Investment Facilitation Council (SIFC), but these efforts lacked a robust policy foundation. Despite modest FDI gains, analysts believe they are “short-term, ad-hoc measures” with “no significant increases” in investment volume. Even with tariff rationalisation, non-tariff barriers, red tape, and weak infrastructure remain major disincentives for FDI.

Poverty alleviation remains a serious challenge for the country. The IMF-mandated austerity measures have led to cuts in public sector development programmes, risking deeper joblessness and poverty cycles. While the Benazir Income Support Programme (BISP) saw a 20 percent funding boost to Rs 7.16 billion, this remains limited in addressing deep-rooted poverty. Nearly 45 percent of the population still lives below the poverty line, with extreme poverty at 16.5 percent. Low or negative growth in agriculture, industry, and services, combined with 2 percent population growth, means stagnant real wages, pushing an estimated 1.9?million people into poverty.

There are perpetual tax system inefficiencies. Only ~1.3 percent of Pakistanis pay income tax and the tax-to-GDP ratio remains just ~10 percent. Reliance on withholding taxes is regressive, disproportionately burdening the poor and limiting redistributive potential.

The debt servicing pressures remains a threat to country’s sovereignty. High interest payments and fiscal guarantees to state-owned enterprises continue to constrain fiscal flexibility and reduce room for investment in growth sectors.

The foremost challenges are political instability, weak institutional capacity and debt burden, where interest payments consume a large share of the budget (~50 percent+), crowding out development needs.

In times to come Pakistan’s annual budget is likely to be a short-term, reactive document rather than a long-term strategic tool for development. It shall remain heavily influenced by IMF programmes, with limited fiscal space and political will to prioritize inclusive growth and poverty reduction independently.

If Pakistan is to transition toward a strategic budgeting model, it would need fiscal discipline beyond IMF pressure, reforms in tax collection and expenditure management, stronger institutions for long-term planning and above all political consensus and will to deliver on development priorities.

Copyright Business Recorder, 2025