Budget FY27: structural challenges

Pakistan is grappling with significant structural issues that require immediate attention. It is crucial to find a balance between fiscal discipline and growth-driven reforms. According to basic economic principles, immediate focus on infrastructure, credible fiscal and monetary policies, and structural changes may be necessary.

The government of Pakistan is set to unveil the federal budget for the fiscal year 2027 on June 10.

Key immediate priorities

• Tackle transmission and distribution losses, which are estimated between 15-20 percent, along with addressing circular debt and inconsistent supply that disrupts industry and agriculture.

• Invest in and modernise the electrical grid, incorporating renewable energy and efficiency measures (such as smart metering and loss reduction).

• Such initiatives can be achieved by lowering industrial power costs and enhancing reliability, which will, in turn, support manufacturing and export growth.

Water management & irrigation

• Construct small to medium-sized dams, enhance canal efficiency, implement drip irrigation, improve flood management, and treat wastewater.

Transport & logistics

• Upgrade roads, railways, and ports, prioritizing the efficiency of Gwadar and Karachi as logistics hubs. Reducing trade costs will foster export growth.

Digital & supporting infrastructure

• It’s encouraging to witness the expansion of broadband, data centers, and fintech services aimed at supporting IT exports. This area should receive ongoing attention.

Managing foreign exchange reserves

• The State Bank of Pakistan holds reserves of $17 billion, totalling $22.6 billion, which covers approximately 2.5 to 3 months of imports.

Efforts should aim to increase reserves by $8-10 billion, achieved through remittances and boosting exports that extend beyond textiles (for example, in IT, engineering goods, and value-added agriculture), while also minimizing non-essential imports through improved efficiency.

Deficit financing (external & domestic), reducing SBP OMO injections, inflation control

• These elements are interconnected. To lower the fiscal deficit to below 5%, there should be an emphasis on increasing revenue collection and cutting unnecessary expenditures.

Significant benefits can be gained by eliminating inefficient subsidies and rationalizing pensions, enabling a focus on developmental programmes.

• The State Bank of Pakistan’s liquidity injection of Rs 14.704 trillion through open market operations (OMOs) should be reduced gradually by 25 percent in order to shift resources towards the banking sector. This shift is essential for lending to the private and agricultural sectors to boost the economy. Without it, achieving sustained higher growth targets will not be possible.

• Global inflationary pressures, partly due to unrest in the Gulf region, are impacting Pakistan, primarily through rising oil and LNG prices, necessitating better coordination between fiscal and monetary policy.

Export strategy (alarmingly low base)

• The economy must diversify away from a textile-centric focus toward IT and explore processed agricultural goods, pharmaceuticals, and engineering sectors.

• A stable PKR policy is necessary to avoid excessive depreciation, as seen previously, which significantly contributed to inflation as businesses struggle to repay through exports and taxes.

However, reducing barriers and regulatory hurdles will certainly facilitate business growth.

Increasing tax-to-GDP to 18-20 percent (ambitious but necessary)

• Achieving this is only feasible by broadening the tax base, which includes taxing agricultural income (a largely untaxed sector), retailers, real estate, and merchants, aided by digitization efforts through the FBR for tracking and e-invoicing.

• Reducing exemptions, adjusting rates where they cause distortions, and enhancing compliance (for example, providing relief to salaried individuals while taxing others appropriately) are key strategies. FBR reforms will be critical for reaching these targets.

Pakistan faces enormous economic challenges that require effective management to improve productivity, enhance exports, attract investments, broaden the tax base, reduce energy inefficiencies, and alleviate financial distortions that are resulting in severe liquidity issues. At some point, it must be recognized that sustainable growth cannot rely on excessive borrowing or mere currency management.

A comprehensive plan to simultaneously boost productivity, exports, investments, and tax revenues is essential.

Pakistan needs to achieve an Advance to Deposit Ratio (ADR) of about 65 percent to 70 percent over the next five years to significantly enhance investment, productivity, employment, and GDP growth, targeting a range of 6 percent to 8 percent.

However, this growth must be driven by exports, investments, and productivity rather than by consumption funded through borrowing, which is no longer a viable solution, given the scale of debt and deficit financing and the recent shifts in the geopolitical landscape affecting lender policies.

This transformation is neither extraordinary nor unachievable. Countries like Indonesia, Vietnam, Bangladesh and others have already demonstrated that it is possible through the implementation of corrective reforms in exports, taxation, infrastructure, and investments can dramatically improve economic performance within a decade.

Global Market

The US non-farm payroll report was significantly stronger than market predictions, providing the Federal Reserve’s policymakers with enough justification to maintain the current policy rate despite earlier calls for cuts.

The payroll growth for May not only surpassed expectations, but the numbers from March and April were also significantly adjusted upward. Meanwhile, the employment rate held steady at 4.3 percent.

Recently released consumer price index (CPI) data showed a year-over-year increase of 0.5 percent, climbing to 4.2 percent primarily due to a spike in energy (gasoline) demand and rising food prices, a development attributed to the ongoing Gulf region conflict.

This overall situation benefits the US Dollar, which experienced a sharp increase following Friday’s job report.

US Treasury yields have surged, which is not advantageous for the US economy, yet it does bolster the Dollar. Consequently, other currencies and gold have faced pressure and lost their upward momentum.

Rising US Treasury yields are viewed as a concerning sign for economic health.

Last week, I mentioned that the $/JPY pair would put pressure on the Japanese authorities and is expected to approach resistance levels at 159.90 and 160.65. On Friday, the pair reached a high of 165.35 and appears to be positioned to explore even higher levels.

Much will hinge on how the Japanese government responds.

They have expressed readiness to defend the yen. Data released last week pointed to a $75 billion decrease in its foreign exchange reserves for May, suggesting intervention occurred last month.

Japan is well-equipped for such intervention, with a substantial $1.3 trillion in reserves. However, market apprehensions center on whether Japan can liquidate assets from US Treasuries or other investments.

Even so, Japanese officials reiterated their readiness to support the currency.

Liquidating foreign assets is more complex than it may seem, as it can disrupt economic stability. For example, the UAE, despite being a major oil exporter with significant foreign exchange and asset reserves, sought a swap facility for obligations. Reports also indicated that India had to sell off $12 billion in gold from its reserves to stabilize its currency. The Reserve Bank of India (RBI) quickly refuted these claims, asserting that the gold reserves remained unchanged at 880.52 tonnes and advised against relying on such media reports, urging trust in official statistics.

Meanwhile, inflationary pressures in the Eurozone are escalating across both services and goods sectors, increasing the likelihood of interest rate hikes in the upcoming monetary policy meeting.

The European Central Bank (ECB) is set to convene on Thursday, where it is expected to raise rates by 0.25 percent.

Eurozone policymakers are facing challenges as the region is also impacted by the US-Iran conflict, which has driven up energy import costs due to disrupted shipping routes.

WEEKLY OUTLOOK - Jun 8-12

#GOLD @ $4,329- Gold remains under selling pressure due to rising oil prices and subsequently a stronger US dollar. It must hold the support level at $4,260 to recover some momentum. If it breaks through $4,398, it could move towards $4,470. However, falling below the support level poses a risk of hitting $4,202.

#EURO @ 1.1521- Euro needs to stay above 1.1425 in order to initiate a recovery. A rise past 1.1610 would support additional gains, which looks tough at the moment. However, if it drops below 1.1440, it may test the 1.1395 level.

#GBP @ 1.3341- Pound Sterling has support near 1.3248, which should aid in its recovery. A rise above 1.3450 is necessary to reach the 1.3502 level. If the support level is breached, it could lead to further declines towards 1.3180.

#JPY @ 160.32- The $/Yen currency pair is set to test the BOJ, aiming for levels around 160.85-90. A break could lead to risks around 161.20. If the BOJ is absent from the market, it may rise to 162.20. Conversely, a drop below 158.90 might bring it down to 157.10 or lower.

Copyright Business Recorder, 2026