I will only say this once, “we continue to remain in the free-fall, the budget 2025-26 deepens the crisis and misses critical reform opportunity”
As Pakistan unveils its federal budget for fiscal year 2025-26 today, the numbers paint a stark picture: an economy in free fall, clinging to austerity and foreign diktats instead of reform and recovery. Finance Minister Muhammad Aurangzeb will present a budget worth Rs17.68 trillion, nearly Rs900 billion less than the previous fiscal year. While officials frame this reduction as “fiscal discipline,” analysts see it as a symptom of a shrinking state capacity, overwhelmed by debt and lacking the political will for structural reform.
At the heart of this budget lies a staggering Rs8.685 trillion allocated to interest payments, consuming nearly half of the total outlay. Of this, Rs7.5 trillion is for domestic debt servicing, and Rs1.1 trillion for foreign loans. With a projected fiscal deficit of Rs6.63 trillion, the federal government is desperately banking on a Rs1.22 trillion surplus from provinces to help close the gap-an expectation that’s been historically unreliable.
‘Without structural reforms, Pakistan risks becoming a country that never escapes crisis-only manages it.’
Meanwhile, the country’s Public Sector Development Programme (PSDP) has been limited to just Rs1 trillion ($3.5 billion). The lion’s share-Rs664 billion-will be spent on infrastructure projects including transport, water, and energy, but allocations for critical sectors such as education, health, science, and technology remain marginal. Prime Minister Shehbaz Sharif has ordered Rs120 billion to be spent on the N-25 Chaman-Quetta-Karachi Expressway, while Rs150 billion is set aside for social sectors, and Rs70 billion for tribal areas. However, experts argue these allocations are a drop in the bucket for a country battling crumbling infrastructure and failing public services. To make up for revenue shortfalls, the government has leaned heavily into regressive taxation. The Federal Board of Revenue (FBR) has outlined nearly Rs869 billion in new tax measures, mainly through indirect taxes-the kind that hurt the poor most. The budget imposes 18% GST on solar panels, e-commerce platforms, and tribal area goods. There’s also a proposed 5% Federal Excise Duty (FED) on everyday food items such as chips, instant noodles, biscuits, and frozen meats, as well as sugary beverages.
This tax strategy has drawn fierce criticism. Former finance minister Dr. Hafiz Pasha called it “an austerity budget wrapped in a populist ribbon”, pointing out that the burden falls squarely on the working class, while powerful lobbies in real estate, agriculture, and retail continue to evade taxation. The BISP stipend may increase from Rs13,500 to Rs14,500 per quarter, but with food and utility prices soaring, this marginal relief is quickly absorbed by inflation.
Even though inflation has come down to 3.5% in May, Pakistan’s economic fundamentals remain weak. The current account, which showed a rare $1.6 billion surplus last year, is projected to return to deficit. GDP growth is forecast at a meager 3.6%, while non-tax revenues are expected to fall to Rs3.9 trillion, mainly due to declining State Bank profits. The only positive is a modest cut in the policy rate to 11%, which could reduce interest payments by Rs1.3 trillion. Still, this is merely a technical fix, not a sustainable economic strategy.
In the background, defense spending continues to rise. Although no official figures have been released, recent hostilities with India and a spike in military rhetoric suggest a hike in the current Rs2.122 trillion ($7.53 billion) defense budget. Critics like Jeffrey Sachs argue that Pakistan’s development is stifled by its militarized spending model: “You can’t build a competitive economy if you invest more in tanks than in schools or solar panels,” he said.
This year’s budget also signals unwavering adherence to IMF guidelines, prioritizing debt payments and subsidy cuts over developmental goals. An Arif Habib Limited report confirms that the Finance Bill 2025-26 eliminates all non-disaster-related supplementary grants, increases FBR targets, and avoids politically risky tax amnesties-all to secure another IMF tranche. While this may satisfy international lenders, it does little to stimulate domestic productivity, innovation, or equity.
Economists and independent experts suggest a radically different path. First, they argue for broadening the tax base, bringing untaxed sectors like agriculture and real estate into the fold. Second, they urge reallocating expenditures, cutting non-development spending, especially defense, in favor of human capital and digital infrastructure. Third, targeted subsidies for small businesses and low-income groups must replace blanket subsidies for wealthy industrialists. Fourth, removing GST on green energy and e-commerce can help stimulate sectors that promise long-term returns. Finally, Pakistan should negotiate debt-for-nature or debt-for-education swaps to ease its repayment burden without cutting essential development spending.
Despite official optimism, there’s little in Budget 2025-26 to suggest a break from Pakistan’s long-standing economic malaise. As global economist Simon Baptist of The Economist Intelligence Unit put it, “Without structural reforms, Pakistan risks becoming a country that never escapes crisis-only manages it.”
The numbers may balance on paper, but for the average citizen-and for the country’s long-term prospects-this is not a budget of progress. It’s a stopgap. Unless deep-rooted changes are made, Pakistan’s economic free fall is unlikely to slow, let alone reverse.
The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.