The Government of Sindh, in its Budget Strategy Paper for FY2026-27 to FY2028-29, has warned of increasing fiscal stress over the medium term, driven by rising expenditure obligations, potential reductions in federal transfers, and expanding compliance requirements under Pakistan’s IMF-supported fiscal framework.
According to the document, the province is likely to face persistent operating budget deficits as expenditure growth continues to outpace revenue generation. Sindh has also flagged its heavy reliance on federal transfers as a key structural risk to fiscal stability.
The strategy paper highlights obligations arising from the IMF-backed 37-month Extended Fund Facility (EFF) programme under the International Monetary Fund International Monetary Fund, particularly through the National Fiscal Pact, which binds provinces to strict fiscal discipline, expenditure rationalisation, and revenue reforms.
Under this framework, provinces are required not only to exercise devolved powers under the constitutional framework following the 18th Constitutional Amendment, but also to assume full financial responsibility for key sectors such as higher education, health, social protection, and local infrastructure.
The document notes that provincial governments will also be responsible for development spending under the Public Sector Development Programme (PSDP), alongside commitments to maintain fiscal surpluses contributing to a national primary surplus target equivalent to 1 percent of GDP. Memorandums of Understanding (MoUs) between federal and provincial governments are part of this arrangement.
Sindh has expressed concern over potential changes in the 11th National Finance Commission (NFC) Award National Finance Commission Award, warning that any reduction in the provincial share of federal divisible pool transfers could significantly weaken fiscal capacity.
The province has also identified the possible discontinuation of the Octroi and Zila Tax (OZT) grant as another downside risk, noting that it has not been included in medium-term fiscal projections due to uncertainty over its continuation.
On the federal side, the document points to uncertainty surrounding revenue performance of the Federal Board of Revenue Federal Board of Revenue. It notes that the revised target for FY2025-26 has been adjusted downward to Rs 13,979 billion from Rs 14,131 billion, while highlighting a significant concentration of collections required in the final quarter of the fiscal year.
The strategy paper projects a sharp increase in employee-related expenditures over the next three years. Spending on salaries and wages is expected to rise from Rs 840 billion in FY2025-26 to Rs 1,156.6 billion by FY2028-29.
Pension and retirement benefits are also projected to increase from Rs 271 billion to Rs 351 billion over the same period. The province currently has 752,069 sanctioned posts, with salaries accounting for approximately 24.5 percent of the total provincial budget.
Despite fiscal pressures, Sindh reported significant progress in tax administration digitalisation. The province stated that 92.6 percent of its revenues in FY2024-25 were collected through digital channels, amounting to approximately Rs 506 billion out of total receipts of Rs 546 billion.
The Sindh Revenue Board is expanding point-of-sale systems in restaurants, hotels, and commercial establishments, while the “e-Pay Sindh” initiative is digitising 47 non-tax levies to improve transparency and efficiency.
The budget strategy paper underscores a medium-term fiscal environment characterised by rising mandatory expenditures, uncertain federal transfers, and tightening compliance under the IMF-supported fiscal architecture. It warns that without structural revenue reforms and improved fiscal coordination, provincial fiscal space may remain constrained in the coming years.