The principal objective of the Federal Budget 2026–2027, prepared under the microscopic scrutiny of the International Monetary Fund, remains to achieve fiscal stability, and the government genuinely believes that its strategy will eventually stimulate economic growth. Based on this assumption, the government has persuaded the provincial governments to commit compulsory savings of Rs. 1.8 trillion from their share in the divisible pool. The provincial governments have graciously agreed to help the federal government tide over the perceived financial crunch by postponing their Annual Development Programmes.
A cursory glance at the Budget 2026–2027 reveals that the federal government projects revenue of Rs. 20.6 trillion and anticipates spending Rs. 18.77 trillion during the next financial year. Debt servicing will consume the lion's share, with an allocation of over Rs. 8 trillion, or 43% of total budget outlays, while national defence will receive Rs. 3 trillion, or nearly 16% of the budget. That leaves the government with only Rs. 7.7 trillion to meet all other expenditures.
The worst affected is the Public Sector Development Programme (PSDP), whose allocation has gradually shrunk from Rs. 1.4 trillion in 2024–2025 to Rs. 1 trillion in 2026–2027. This explains the lopsided priority attached to sustainable development. This is not surprising, as we observe that the government was able to utilise only half of the PSDP allocation of Rs. 1.1 trillion during the outgoing fiscal year. The development inertia is further accentuated by administrative inefficiencies and skewed management practices, where politically motivated projects are prioritised over economically beneficial schemes.
The 7th National Finance Commission (NFC) Award entitles the provinces to receive 57.5% of the divisible pool of federal revenues. After the compulsory surplus/savings of Rs. 1.8 trillion taken by the federal government, the provinces would, however, be left with some 46% of the pool, while the federal government would control over 57% of it, in addition to the non-divisible pool of Rs. 5.3 trillion at its disposal, along with the facility of deficit financing projected at Rs. 5.2 trillion.
Fears that the federal share of 43% undermines its ability to meet national obligations are, therefore, unfounded. The federal government will actually collect Rs. 20.6 trillion and spend Rs. 18.7 trillion. This gives it effective control over 90% of the national kitty. We must appreciate the generosity of the federating units for the national cause. However, the federal government would be well advised to eschew its proclivity to rely on external borrowing and adopt governance that avoids looking for domestic dole-outs or reducing development expenditure at will.
Objectively speaking, defence spending stands at 2.3% of the Gross Domestic Product (GDP), which is in accordance with the global average, especially bearing in mind the external challenges to national security that Pakistan faces. The expenditure seems on the higher side only when viewed as a percentage of budget outlays (16%). The recent successive conflicts in the region and beyond emphatically underscore that strong national defence is a sine qua non for national security.
Multiple bailouts by the International Monetary Fund suggest that our governments consider it not as a lender of last resort, but as an angel of mercy
Lopsided policies and misplaced priorities have made Pakistan the most frequent client of the International Monetary Fund. It is now in its 24th assistance programme since 1958. The main reason for our reliance on International Monetary Fund bailouts is not any lack of natural or human resources but the failure to attain fiscal stability through good governance. Multiple bailouts by the International Monetary Fund suggest that our governments consider it not as a lender of last resort, but as an angel of mercy. International Monetary Fund assistance comes with strings attached, designed to keep the borrowing country in a perpetual debt trap.
Borrowing is indeed a global practice followed by most governments in both developed and developing economies alike. The problem lies not in the level of debt but in its utilisation. Responsible governments borrow money to use it as an instrument of growth. Successive governments in Pakistan have, however, borrowed to cover the resource gap caused mainly by economic inefficiencies, skewed policies, bleeding state-owned enterprises, artificially created circular debt, and political patronage.
Despite uneconomical borrowing, our national debt of Rs. 80 trillion constitutes 70% of Gross Domestic Product, which is still a normal average for developing economies and far below the debt levels of developed economies such as Japan, France, or Canada. Our main issue with debt is the narrow base of revenue generation that does not allow us to create space for growth.
For example, a meagre one percentage point increase in the tax-to-GDP ratio could generate additional revenues of Rs. 1.27 trillion, while plugging loopholes that facilitate the pilferage of national resources could save an additional Rs. 5–6 trillion each year. This would not only create fiscal space for sustainable development but also help pull the country out of the dangerous debt trap.
The state of the economy reminds us of our world-renowned economist, Dr Mahbub ul Haq, who was the young Chief Economist of the Planning Commission of Pakistan during the 1980s. He devised the Human Development Index (HDI). He identified the factors that stymied economic growth. These were: fascination with figures to find growth indicators; following development models that ignored ground realities; obsession with gaudy investments; addiction to excessive and arbitrary controls over business activities; fetishisation of growth without social justice; the divorce between planning and implementation; and neglect of human development.
He described the above factors as the 'seven sins' of economic planners in the Global South. The diagnosis of Dr Mahbub ul Haq applied then to the system of governance in Pakistan and remains valid even today. Cost escalation caused by the delayed completion of development projects, coupled with skewed policies aimed at the short-term objective of attaining fiscal stability without building a strong industrial base or focusing on basic health, education, research, and development to lay the foundation for sustainable development and equitable growth, is the principal cause of our economic troubles.
Let us remind ourselves that we are citizens of the fifth-most-populous country on the planet and a declared nuclear power that boasts the world's 14th-most-powerful military. The country's firepower was tested and validated last year in Maarka-e-Haq (Contest for Truth), when Pakistan repelled aggression from its arch-enemy and shattered India's dream of Maha Bharat, as well as its claim to the status of a security guarantor in South Asia.
Pakistan gained diplomatic glory recently when it successfully mediated between the world's sole superpower, the United States, and the most sanctioned country, Iran, during a war that ran the risk of destabilising the region and stifling the global economy. President Donald Trump unequivocally credited Field Marshal Asim Munir with playing the leadership role in bringing an end to the devastating conflict. It will not be out of place to say that the Field Marshal proved wrong the long-held adage that 'war is too important to be left to generals'. This diplomatic triumph is synonymously known in local parlance as Maarka-e-Aman (Contest for Peace).
Having gained glory on the battlefield and pulled off a diplomatic feat, the leadership must now set its sights on chronically stifled economic growth, where Pakistan has lagged far behind its peers. The national economy of the fifth most populous country and a declared nuclear power still ranks 40th in the world, while the country languishes at 168th place on the Human Development Index.
The main areas requiring attention are removing systemic inefficiencies that act like termites on the national economy; gradually raising the tax-to-GDP ratio from the existing 10–11% to around 20% over the coming decade; helping the private sector build a strong industrial base and promoting the services sector to raise the savings and investment rate, which currently hovers around 13–14% due to the high cost of borrowing; lifting the 45% of people living below the poverty line out of poverty; and expanding public sector development. This will require political will and good governance.