Pakistan has acquired stability. The dollar has been stable since late 2023 and inflation has been curbed. Even tax collection has increased somewhat over the past two years. The question to ask ourselves, before the budget is presented, is whether we prefer stability over growth? This reminds me of Rousseau’s answer to the Hobbesian obsession with safety: a man may be safest in confinement, but safety alone is not freedom. Pakistan’s economy now faces a similar test.
The balance sheet may look calmer, the rupee may no longer be in free fall, and inflation may no longer be running at the extremes of 2023. But are Pakistanis becoming more prosperous, or merely more accustomed to surviving inside a tighter fiscal cage?
The exodus of the MNCs, the rising domestic debt, the IMF pressures and the spillover from the Iran-US war have all threatened our so-called stability. For years, the Ministry of Finance has simply resorted to lip service as far as PSDP is concerned, making only cosmetic changes to the balance sheet to appease a few segments while pushing through certain unpopular changes elsewhere. This has become a recurring pattern of Pakistan’s budget-making: preserve the appearance of stability, satisfy the IMF, make a few adjustments to calm selected constituencies, and then return to the same fiscal structure that keeps growth weak and debt servicing dominant.
The NFC Award, to start with, has been the bone of contention. An award that came along with the 18th amendment to the constitution, it came as a financial package for self-reliant provinces. Unfortunately, provinces did take their due share but failed to share the responsibilities with the federation. Since the past 16 years, provinces’ collection of revenues has been abysmally low, especially for both Punjab and Sindh (who get the most out of the NFC).
After 57.5 percent is allocated to the provinces from the divisible pool, the Centre is left with a mere 42.5 percent, along with non-tax revenues. With these meagre resources, the federation continues to carry the burden of debt servicing, pensions, subsidies, federal development, BISP and civil government. This mechanism almost always leads to a deficit, with the federation running out of money sooner than expected. The result is more borrowing through T-Bill auctions, which only adds to future debt servicing. Reports now suggest the government may seek legal cover to retain Rs1.1 to 1.2 trillion from the provinces’ NFC shares for strategic and development spending; a tacit admission that the formula has left the Centre structurally short.
This begins the most tragic part of the economic policy of Pakistan. The deficit, including what is left for PSDP, is largely funded through domestic debt. But domestic debt is dangerous. When the government leans on domestic debt heavily, the central bank ends up providing liquidity to banks so they can keep absorbing government paper. This may not be direct money-printing, but it creates a similar effect: more liquidity chasing government debt, more pressure on inflation, and more risk for the rupee. The result? Pakistan had to choose the painful path of very high interest rates, with the policy rate peaking at 22 percent, to curb inflation and stabilise the rupee, rely on the IMF for foreign-exchange stability and the import of energy products, whilst simultaneously relying on domestic debt.
This virtually increased debt to exponential levels at extremely high interest rates. Hence, debt servicing costs also increased, creating a dangerous debt trap. By 2026, the cost of servicing federal debt had risen from roughly Rs3.06 trillion in FY2021-22 to about Rs8.2 trillion in FY2025-26, a rise of more than two and a half times. The trajectory shows no sign of bending: central government debt rose by Rs1.4 trillion in April 2026 alone, pushing the total stock to a record Rs81.9 trillion.
Enter petroleum levies within non-tax revenues, one of the most regressive fiscal tools at the state’s disposal. It is no surprise that fluctuating fuel prices internationally never fully trickled down to the average Pakistani. This was in part because the high interest on domestic and international debt had to be paid through non-tax revenues by the centre. One easy way to do that was to rely on high petroleum levies. Interestingly, rising domestic debt has moved alongside rising petroleum levy collections. By FY2025-26, petroleum levy receipts had risen from roughly Rs127.5 billion in FY2021-22 to a target of Rs1.468 trillion, more than an eleven-fold rise. Ironically, in just two years, motorists paid roughly the equivalent in petroleum levy, around Rs2.725 trillion, as the entire combined rupee value of both IMF programmes. Add the Rs3.23 per unit surcharge, levied to service the interest on a Rs1.225 trillion commercial bank loan the government took to clear old power arrears, a price the average Pakistani pays for IPP capacity payments, line losses and state negligence.
The Budget for FY26-27 would be presented against this backdrop. As of now, the proposed measures only confirm this pattern of regressive measures. So far, the headline is an 18 percent tax on stationery, cleared by the IMF and effective from 1 July, which would only make things difficult for students. This directly contradicts the spirit of Article 25-A of the constitution, which makes free education the obligation of the State. Further hikes in GST from 18 to 19 percent are also expected. Solar panels might also be taxed at 18 percent forcing consumers back to the grid, with GST exemptions expiring on 30 June. Electric vehicles face a similar reversal, with imports likely to attract sales tax of up to 25 percent as exemptions lapse on 30 June.
The new “Fixed Tax Asaan Scheme”, another proposed measure, has faced severe backlash. It follows last year’s failed Tajir Dost Scheme. Under this latest “innovation”, traders with annual turnovers of up to Rs200 million would pay a flat 1 percent of turnover, subject to a minimum of Rs25,000, and would be exempt from POS (point of sale) and audit requirements. Perhaps well-intentioned, this measure too falls short of meeting the mounting expectations on federal and provincial revenue boards, which have turned a blind eye towards politically sensitive sectors.
The current situation leads back to an age-old problem: under-allocation of PSDP. Since most of the revenue is spent before it can be saved, development projects face under-allocation. High inflationary costs and recurring under-allocation has stalled major development projects, creating in the words of Ahsan Iqbal, “a circular debt crisis”. With 800 ongoing projects carrying Rs11 trillion in throw-forward liabilities, a mere Rs1.126 trillion federal PSDP would delay these projects for years; at this pace, clearing the existing pipeline alone would take close to a decade.
The budget is just around the corner. Sanity should prevail this year. Stability is not growth, and Pakistan is in dire need of growth to move forward. If the NFC Award is to be kept the same, provinces need to take more responsibility. One way this could be done is for provinces to assume a proportional share of federal obligations through a responsibility-sharing mechanism. This could be done by bringing agriculture into the tax net, a sector which accounts for about 23.5 percent of GDP but remains vastly under-taxed.
Exporters should be given priority, especially IT exports, a sector which has performed exceptionally well, with IT exports rising 21.14 percent to USD 3.811 billion in the first ten months of FY26 and projected to reach USD 4.5 to USD 4.6 billion for the full year. Private credit needs to be extended to start-ups, akin to angel investing or venture capital in the West. If interest rates are to be kept higher, export zones and special interest rates could be offered to encourage exporters. This is much needed.
A side-effect of raising revenues through petroleum levies is higher inflation. This is then curbed by keeping interest rates exceptionally high. By taxing undocumented sectors, revenues can be increased without resorting to petroleum levy hikes. Hence petroleum levies should be decreased, and space should be created for interest rates to come down, with agriculture, retail, real estate and undocumented services being brought into the tax net. This would give breathing space to the general public and help the economy grow.
Setting unrealistic targets for FBR will only result in the economy collapsing under its own weight. Revenue sources need to be increased by finally taxing the holy cows: agriculture, real estate, retail and undocumented wealth. The government has relied less on net domestic borrowing this year, in line with the smaller deficit, but further reliance on debt would only increase debt servicing costs and further strain growth. As of now, the average Pakistani carries a debt burden of roughly Rs330,000 against per capita income of around Rs510,000 to Rs530,000. We cannot afford more debt.
Finally, the government needs to provide relief to consumers and businesses for their energy needs. This is most essential in the age of AI. The remaining IPP contracts need to be renegotiated, energy costs need to be reduced, and circular debt needs to be tackled meaningfully to reduce electricity bills for all consumers. Without cheaper and reliable energy, Pakistan cannot build an export economy, an IT economy, or an AI-ready economy.
Copyright Business Recorder, 2026
The writer is an economist and an educationist