Pakistan presents annual budget with significant defense portion, tighter taxation under IMF guidelines
Islamabad seeks to balance national security needs with economic stabilization and structural reforms
ISLAMABAD, Pakistan (MNTV) — Pakistan’s government unveiled its fiscal year 2025–26 budget on Tuesday, proposing a 20% hike in defense spending alongside a 7% cut in overall federal expenditure.
The move reflects Islamabad’s attempt to stabilize the economy and meet IMF reform targets following heightened regional tensions and persistent fiscal pressures.
Presented by Finance Minister Muhammad Aurangzeb in Islamabad, the 17.57 trillion rupee ($62 billion) budget outlines a policy agenda aimed at restoring macroeconomic stability, addressing the country’s fiscal deficit, and positioning the economy for export-led growth — all while managing geopolitical tensions and meeting key IMF reform benchmarks.
The budget allocates 2.55 trillion rupees ($9 billion) for defense, a significant increase from 2.12 trillion rupees the previous year, making 1.97% of GDP.
Indian defence budget for 2025-26 is Rs. 6,810 bn ($81 billion), also 1.9% of the country’s projected GDP.
Including military pensions and development expenditures, the total defense envelope now stands at 3.29 trillion rupees ($11.67 billion).
The steep rise follows a brief but intense military confrontation with India in May—the most serious exchange between the nuclear-armed neighbors in nearly three decades.
The move to increase military spending comes as both India and Pakistan have signaled heightened strategic preparedness, with New Delhi also announcing a nearly 10% rise in its own defense budget.
Prime Minister Shehbaz Sharif underscored the government’s intent to project both military and economic strength, stating: “After defeating India in a conventional war, now we have to surpass it in the economic field.”
Despite the increase in defense outlays, Pakistan’s budget reduces total federal expenditure from the previous fiscal year — a reflection of efforts to rein in the fiscal deficit, projected at 3.9% of GDP for FY2025–26, compared to a revised 5.9% for the outgoing year.
This consolidation is central to the government’s negotiations with the IMF, with which it hopes to secure a new multi-billion-dollar Extended Fund Facility.
Key reforms include improved tax administration, restructuring loss-making state-owned enterprises, and enhancing energy sector efficiency.
Aurangzeb reiterated Islamabad’s commitment to structural reforms, describing the budget as “the start of a strategy to boost exports, increase foreign currency reserves, and create a more competitive economy.”
Growth outlook improves, but lags region
The government has set an ambitious growth target of 4.2% for FY2025–26, up from an estimated 2.7% in the current fiscal year, though still behind regional peers. The Asian Development Bank forecasts South Asia to grow by 6.0% in 2025.
Inflation is projected to ease to 7.5%, down from the double-digit levels witnessed over the past two years, aided by a series of interest rate cuts by the State Bank of Pakistan.
While lower borrowing costs may stimulate private investment, analysts caution that tight fiscal conditions and IMF-related constraints could continue to weigh on economic activity.
In line with IMF demands, the government reiterated its intention to accelerate privatization of loss-making state firms, beginning with Pakistan International Airlines (PIA), whose divestment is seen as a litmus test for broader economic reform.
A major thrust of the new budget is to shift Pakistan’s growth model toward exports and industrial competitiveness.
The government aims to stimulate domestic manufacturing, enhance agricultural productivity, and expand trade linkages — all in an effort to avoid recurring balance-of-payments crises that have historically undermined economic stability.
With debt servicing remaining the largest component of Pakistan’s expenditure, the country’s reliance on external financing continues to grow.
The new budget is expected to play a pivotal role in securing the IMF’s approval for a fresh loan program, vital for stabilizing foreign exchange reserves and restoring international confidence.
As Pakistan attempts to reposition itself in a competitive global economy, the FY2025–26 budget will be scrutinized not only for its fiscal numbers but also for its credibility in executing reforms.
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