As Pakistan inches toward unveiling the FY26 federal budget, the economy finds itself balancing on a precarious threshold: teetering between signs of stability and deeply embedded structural frailties. The outgoing fiscal year, FY25, was modestly redemptive, with key indicators pointing to tentative recovery. Yet, growth remains anaemic, inflation—though sharply down—masks deeper cost-of-living scars, and fiscal space is suffocating under the weight of debt and stagnant revenues. The novel budget, therefore, is not just an accounting exercise; it is a litmus test for the state’s resolve to reform or relapse.
GDP growth for FY25 has provisionally clocked in at 2.68%, narrowly edging past the previous year’s 2.51%. While a technical recovery, it is well below the government’s target of 3.6% and significantly under potential. Agricultural output, long the Achilles’ heel of Pakistan’s economy, fared particularly poorly, recording a mere 0.56% growth. Staple crops like wheat and cotton registered double-digit declines in output, underscoring a chronic yield deficit compared to global averages.
The wheat yield, at 3.18 MT per hectare, falls short of the global 3.59 MT, with improvement potential of 508,000 metric tons, translating into possible savings of $120 million, as per Tola Associates. It is attributed to first: Fixed-price procurement ended in 2024 due to fiscal pressures. Prices crashed by 50% compared to 2023, hurting small farmers (under 10 acres—who are the largest producers).
And secondly, there are structural barriers like: (i) Poor access to finance and technical knowledge; (ii) Limited use of certified seeds, modern equipment (e.g., seed drills), and balanced fertilisers. (iii) Significant on-farm and post-harvest losses due to poor storage and handling. Similar gaps exist in rice and cotton productivity, demanding immediate investment in mechanization, irrigation reform, and seed quality.
Failure to deliver will not just disappoint, it will perpetuate the boom-bust cycle that has defined Pakistan’s economic history
Industry showed a patchy revival. Although overall industrial growth was reported at 4.77%, Large-Scale Manufacturing (LSM) contracted by 1.5%, raising questions about data reliability. The cotton, textile, and auto sectors displayed recovery, but others remained subdued. Energy tariffs and substantial real interest rates continue to choke industrial competitiveness. The services sector, accounting for nearly 60% of GDP, emerged as a steadying force, particularly finance, wholesale trade, and information technology.
Inflation presents a rare bright spot. From the punishing highs of 24.9% (Jul–May FY24), CPI has dropped to 4.6% (Jul–May FY25), aided by easing global prices and a stable rupee. With food inflation near zero, the State Bank of Pakistan (SBP) responded by slashing interest rates from 22% to 11%, a move aimed at reviving private investment. Yet, real interest rates remain high, keeping credit costly.
On the fiscal front, concerns have only deepened. The Federal Board of Revenue (FBR) has collected PKR 10.2 trillion in taxes up to May, marking a 26% year-on-year increase. Notwithstanding, it remains poised to miss the revised target of PKR 12.3 trillion by roughly PKR 1 trillion. The IMF-mandated revenue target for FY26 is even more ambitious, approaching PKR 14 trillion. However, any attempt to raise additional revenue remains constrained by an overreliance on indirect taxation, a narrow tax base, weak administrative capacity, blanket policy measures, and excessively high rates, placing the system on the wrong side of the Laffer curve.
Public debt stands at PKR 74.936 trillion (Rs 6.022 trillion YoY increase) by the end of April, or 64% of GDP, with external obligations amounting to Rs 22.413 trillion (30% of the CGD), breaching the Fiscal Responsibility and Debt Limitation Act (FRDLA). Debt servicing alone consumes nearly half of government revenues, leaving limited fiscal space for development spending. In 2024, the situation has deteriorated vis-à-vis past years: interest payments account for 81% of tax revenue (2023: 73%), 403% of development expenditure (2023: 301%), and 40% of total government expenditure (2023: 35%).
The external sector, though, has shown improvement. Pakistan posted a current account surplus of $1.88 billion between July and April FY25, reversing a $1.34 billion deficit from the previous year. This turnaround was powered largely by record remittances, which soared to $31.21 billion (a 30% jump), thus masking real performance and showcasing unchecked reliance on it.
However, the trade deficit remains wide at $24 billion, driven by stagnant exports and resurgent imports. Export receipts for Jul–Apr FY25 stood at $29.45 billion (a 4.72% increase), remaining concentrated in low-value textiles, while imports rose to $53.45 billion (a 7.3% increase). The only way forward is to diversify markets (especially in light of declining global multilateralism and rising trade wars), export baskets by tapping into IT, rice, and agro-processing sectors, and attract consistent FDI by ensuring regulatory certainty and contract enforcement.
As budget day looms, early signals suggest a mixed fiscal outlook. The total FBR revenue target is expected to be fixed at around PKR 14 trillion. Current expenditures are projected just shy of PKR 23 trillion, of which PKR 16 trillion will be federal. Defence spending, already projected to rise by 13.7% based on pre-conflict allocations, may exceed these figures due to recent geopolitical tensions—potentially increasing by up to 32% to Rs2.8 trillion.
Development spending, as always, is the likely casualty. The federal development budget—originally PKR 1.4 trillion last year—saw only PKR 449 billion spent by April. For FY26, the federal Public Sector Development Program (PSDP) is expected to be capped at PKR 1 trillion. This restraint comes despite glaring development needs: 44.7% poverty, 26 million out-of-school children, and public spending on education and health still below 5%. Once again, the federal government appears poised to sideline its development agenda in the name of fiscal discipline.
This budget also arrives at a time when Pakistan arguably has the best chance in years to make structural reforms. Inflation is down, deficits are under control, reserves are rising, and the government enjoys backing from the military and faces no serious opposition. Citizens, however, have paid the price of stability: sacrificing income, rights, and freedoms. The state now owes them tangible outcomes: a broader tax base, reform of loss-making state-owned enterprises (SOEs), comprehensive tariff policy, robust debt management, implementation of green fiscal tools (water-pricing, carbon levy, plastic levy etc. ) , and a definitive solution to the circular debt crisis in the power and gas sector.
Failure to deliver will not just disappoint, it will perpetuate the boom-bust cycle that has defined Pakistan’s economic history. The dilemma is clear: should Pakistan continue following the narrow pro-cyclical path of fiscal austerity or pivot toward a homegrown pro-growth anti-cyclical solution that prioritizes real growth through agricultural and industrial revival, exports, and energy affordability? If the 2026 budget is to mark a turning point, it must shift the burden off the compliant few, end predatory taxation, and invest in productive capacity.
The choices made in this budget will reverberate across the economy and society for years. Let’s hope they reflect a vision “bold” enough to break the cycle.