Pakistan: Upcoming FY27 Budget

The foremost challenge confronting our economic leaders as they develop a budget for a nation heavily burdened by debt and reliant on foreign loans for many decades is how to effectively formulate the budget.

Emerging economies like ours continually face this daunting task, with establishing a balanced budget that ensures future financial stability being the central issue.

These countries experience persistent refinancing problems, worsened by sluggish economic performance characterised by lacklustre export growth, rising import costs, and alarmingly low tax revenues, all creating complications for financing deficits.

As a result, they are forced to take on new loans to service maturing debts and interest payments while frequently rolling over existing obligations.

A significant obstacle is securing the necessary financing and managing the costs associated with it, which are intensified by rising global inflation and high interest rates.

Poor credit ratings make borrowings more expensive and increasing the risk of currency depreciation, which, in turn, increases the burden on the domestic currency during times of uncontrollable inflation that lead to sharp increases in policy rates.

This situation often drives excessive money printing and a considerable amount directed toward government expenditures to bridge deficits.

To effectively tackle these problems, it is crucial to pinpoint and correct the root causes.

Pakistan’s tax-to-GDP ratio has stagnated at around 10 percent, significantly lower than the Asia-Pacific average of 19 percent. Occasional increases of 1 percent to 2 percent through adjustments serve only as temporary measures, and without sustained growth, they won’t be sufficient.

We have seen sudden shifts through adjustments in the advance to deposit ratio (ADR) of commercial banks over the past year, which has risen sharply without any real benefits to the economy, as this growth has not been reflected in GDP figures.

Establishing a target tax-to-GDP ratio of 15 percent by FY2028-29 should be our key objective.

Additionally, we need to confront the significant burdens of debt and the high costs associated with servicing it, as interest payments currently account for more than 42 percent of total expenditures.

This financial crowding discourages private sector borrowers, creates mismatches, raises the risks of external financing, and places more pressure on the currency. Such a scenario is unsustainable unless the economy operates at a surplus.

Moreover, inefficiencies and political interference in subsidies, along with issues like energy circular debt and loss-making state-owned enterprises (SOEs), drain financial resources. Steps must be taken to eliminate these obstacles. Once any policies are in place, the economy should shift away from protectionist measures by avoiding new tax exemptions and statutory regulatory orders (SROs) in sectors such as fertilizer, sugar, wheat, energy and others that lead to revenue losses.

Another serious challenge is our excessive dependency on government borrowing, both foreign and domestic, due to persistent shortfalls in tax revenues.

This practice needs to be limited, with conditions that funding requires two-thirds approval from both the parliament and the senate to resolve this issue effectively.

We should aim for a primary surplus that exceeds 2 percent of GDP while also ensuring that deficits remain below 5 percent.

It’s reassuring to observe considerable investments in Pakistan Investment Bonds (PIBs) instead of treasury bills. However, efforts should focus on maintaining PIBs with maturities exceeding five years, rather than opting for shorter durations, as these longer-term bonds could offer greater economic relief.

Striving for a growth rate of over 5 percent in the next three to five years is essential, achievable only throu gh extending a minimum of Rs 3 trillion in credit to the private sector. Additionally, funding for the agricultural sector should surpass Rs 3.5 trillion annually. Otherwise, achieving the enormous tax collection goals set each fiscal year by IMF will not be possible unless banks significantly expand their lending portfolios.

Failure to support these critical sectors, which are essential for economic recovery, will hinder progress in restoring confidence, creating jobs, improving infrastructure, and promoting growth in both private and agricultural areas.

Slower growth is already having negative effects in various sectors, as it is inadequate to keep up with the increasing population of more than 4 million each year.

Ultimately, our most significant economic hurdle is creating surplus liquidity for lending, which requires a strategic policy change to optimise the use of our resources.

To meet the liquidity demands for credit in the private and agricultural sectors, the SBP must, despite the challenges, reduce funds injected through open market operations (Rs 14.53 trillion Conventional/Shariah OMO injection amount) while preventing any tightening of liquidity in the interbank market, which would force banks to lend to both sectors.

Currently, geopolitical uncertainties and high oil prices significantly threaten economic stability. Even with the unrest in the Middle East, I don’t anticipate a significant drop in remittance flows, which are likely to remain near the intended level.

Moreover, the influx of funds is not expected to be as substantial as many market predictions suggest.

We might see some small ups and downs in the initial quarter of the new fiscal year, but we can expect stability to return in the following quarters. It is a common occurrence to observe a decrease in remittances in the months after Eid-ul-Azha and Eid-ul-Fitr, as expatriate Pakistanis tend to send the highest amounts during these religious festivities.

The flow of remittances is essential for our foreign exchange reserves and plays a significant role in enhancing Rupee liquidity.

Additionally, it supports a healthier balance of payments situation.

Given the current situation stemming from geographical challenges, along with uncertainties regarding operational matters in the Strait of Hormuz, irregular shipping routes, and supply limitations, it seems unlikely that exports will make a significant recovery or increase.

In the absence of a backup or alternative plan to safeguard the foreign exchange reserves, the government should thoughtfully evaluate the possibility of implementing stricter import controls on cars, electronics, cell phones, and a limited number of other products through budgetary actions, until geopolitical tensions subside.

The economy cannot handle the negative impacts of weather-related shortages affecting wheat, cotton, pulses, rice, maize, and sugar.

Therefore, until the US-Iran conflict is resolved. To serve the nation’s best interest, Pakistan must develop contingency plans for oil, gas and food, which may include considering a temporary 6 to 12-month ban on exporting food and essential commodities.

WEEKLY OUTLOOK - MAY 25-29

Last week, the market remained anxious, concentrating on the ongoing conflict in the Middle East, which is still unresolved. On the economic side, the minutes from the recent Federal Open Market Committee (FOMC) meeting were released, revealing a more hawkish approach due to escalating inflation pressures, primarily driven by rising energy and gas prices.

At the same time, the bond market and oil prices faced downward pressure, as a sell-off caused treasury yields to increase and oil prices to rise. The climb in US treasury yields raises concerns for homebuyers, contributing to higher mortgage rates.

Interestingly, despite elevated oil prices, US economic data reflects resilience, with the economy showing signs of strength and a stable labour market, albeit with rising inflation.

This trend suggests that the Federal Reserve is unlikely to make changes to interest rates this year.

However, despite ongoing peace efforts in the Middle East, the future remains uncertain.

On another note, the optimism for peace and resolution between the US and Iran has propped up gold prices.

This week, gold’s direction will also hinge on the developments in the Middle East, as events will influence its pricing. A delay in reaching a settlement could lead to a drop in gold prices and a rise in oil prices, benefiting the US dollar.

Conversely, a peace settlement would ease tensions and promote stability in the financial markets.

#GOLD @ $ 4509- The movement of gold will remain influenced by the news related to the ongoing conflict between the US and Iran, which will dictate its direction. This week, important support levels to watch on the downside are $ 4405 and $ 4340.

However, if it breaks through $ 4598, it could rise towards $ 4678.

#EURO @ 1.1603- There is still potential for a decline, but the Euro is unlikely to surpass 1.1675/85. Support levels are at 1.1518 and 1.1480.

#GBP @ 1.3430- As long as 1.3485 holds, Pound Sterling will continue to face downward pressure. A decline below 1.3325 is necessary to target 1.3290.

#JPY @ 159.20- Traders are likely to evaluate the Bank of Japan’s determination in safeguarding their currency. The $/JPY pair may attempt to reach the 160.00-10 range. A breakout could drive it up to 161.15 or even higher. Conversely, a drop below 158.02 could lead to a more significant decline towards 156.50 or 155.40.

Copyright Business Recorder, 2026