Pakistan enters the FY26 budget season at a critical crossroads — grappling with persistent vulnerabilities, yet infused with a renewed sense of resolve. The brief but consequential May 7–10 conflict with India has left a lasting imprint — not only on resource allocation but also on national sentiment.
This moment, though born out of adversity, presents a unique opportunity for economic realignment.
The FY25 economic performance presents a mixed picture. Pakistan’s economy expanded by 2.68 per cent, slightly higher than the 2.51pc growth recorded the previous year, but still falling short of the government’s 3.6pc target. The services sector, with an estimated expansion of 2.91pc emerged as the principal driver of growth, while agriculture stagnated and industry contracted. The GDP expanded to $411 billion, and per capita income rose modestly from $1,680 to $1,824.
These figures reflect a story of resilience held back by deep-rooted structural inertia.
Without simultaneous progress on equity and institutional reform, Pakistan’s fiscal sustainability — and its broader economic stability — will remain at risk
As the government prepares the FY26 budget, both the economic data and national context demand sharper policy focus and disciplined fiscal strategy. The budget must begin by acknowledging fiscal constraints: a narrow tax base, rising debt repayments and defence expenditures, and an underperforming public sector.
The extent of the government’s fiscal strain is evident from its heavy reliance on commercial bank borrowing. Between July 1, 2024, and May 16, 2025 — just 10 and a half months into the current fiscal year — budgetary borrowing from commercial banks reached Rs2.74 trillion, according to the latest report from the State Bank of Pakistan. This figure is expected to rise further by the fiscal year’s end on June 30.
The top priority should be broadening the tax net, not by further burdening the compliant few, but by systematically integrating untaxed and under-taxed sectors, particularly retail, real estate, and agriculture, into the formal economy more effectively.
Provinces began collecting agricultural income tax under the International Monetary Fund’s (IMF) $7bn loan conditions from this fiscal year, yet total collections remain a mere fraction of the sector’s actual potential.
Pakistan’s ongoing tax reforms, driven by IMF conditions and World Bank support, must pursue a dual objective: of not only raising the abysmally low tax-to-GDP ratio (currently stagnating at around 9pc, the weakest in South Asia) but also ensuring fair and equitable taxation.
The FY26 budget must catalyse industrial revival through targeted energy reforms, affordable credit lines, and incentives for export-orientated manufacturing
At present, the system disproportionately burdens salaried professionals and formal-sector businesses. This imbalance perpetuates inequality and stifles revenue potential.
Without simultaneous progress on equity and institutional reform fronts, Pakistan’s fiscal sustainability — and its broader economic stability — will remain at risk.
Deficit-ridden state-owned enterprises continue to drain fiscal resources — though Pakistan International Airlines has reported an operating profit for the first time in two decades. A credible roadmap for restructuring or privatising all loss-making entities is long overdue. Without this, fiscal consolidation efforts will remain superficial. Rationalising untargeted subsidies and redirecting them toward productivity-enhancing and human development investments could yield lasting dividends.
Agricultural performance in FY25 was dismal. Growth was limited to just 0.56pc, with sharp declines in key crops including wheat, maize, rice, sugarcane, and cotton. While certain horticultural and minor crops showed promise, the sector’s overall fragility poses a threat to both food security and rural livelihoods. Budget allocations must focus on agricultural extension services, mechanisation, water efficiency, and climate resilience — not merely on price supports.
Moreover, industry shrank by 1.5pc, revealing deeper structural flaws. Elevated input costs, including high interest rates, persistent energy shortages, and costly gas and electricity, combined with demand suppression, dealt a severe blow to large-scale manufacturing.
The FY26 budget must catalyse industrial revival through targeted energy reforms, affordable credit lines, and incentives for export-orientated manufacturing. Industrial policy must no longer be seen as a fiscal burden but rather as an essential investment in future competitiveness.
In contrast, the services sector demonstrated welcome dynamism with a 2.91pc growth. Driven by wholesale and retail trade, transportation, and communications, it carried much of the economy’s weight. This resilience must now be further harnessed through digital infrastructure upgrades, fintech promotion, and skilling initiatives to sustain job creation.
Externally, the global environment remains fraught. Elevated interest rates in advanced economies, volatile oil markets, and slowdowns in key partner economies like China continue to strain Pakistan’s external account management.
Pakistan must adapt to shifting global trade routes and evolving geopolitical realignments. The upcoming budget should include measures to deepen trade ties with Central Asia and the Gulf, support export diversification, and promote import substitution.
Published in Dawn, The Business and Finance Weekly, June 2nd, 2025
