Pakistani Budgetary Foresight for 2025-26

Considering previous fiscal plans and the current stringent International Monetary Fund (IMF) program, Pakistan’s budget for 2025-26 largely mirrors the strategies of prior years. However, there’s a notable decrease in the revised current expenditure estimates for 2024-25, primarily due to reduced domestic borrowing costs—an 11% discount rate now compared to 20.5% in June 2024.

Current expenditure is projected to fall to 16.286 trillion rupees next year (including 8.206 trillion rupees for mark-up) from 16.390 trillion rupees in the revised 2024-25 estimates (which included 8.945 trillion rupees for mark-up). This decline is anticipated due to further discount rate reductions. The IMF, in its May 2025 staff-level agreement, advised the State Bank of Pakistan (SBP) to “calibrate monetary policy carefully, removing monetary restraint gradually,” and emphasized the importance of “effective communication” to enhance public understanding and support for the Monetary Policy Committee’s decisions. This advice is particularly relevant given the strong pressure on the MPC to lower rates, which contributes to the “elevated risks” to the IMF program, crucial for avoiding potential default. Currently, Pakistan relies on $16 billion in rollovers from friendly nations and other multilateral/bilateral support, all contingent upon an active IMF program.

However, a lower discount rate negatively impacts national savings schemes, projected at 141.288 billion rupees next year, down from 164.944 billion rupees in the revised 2024-25 estimates—a 17% decrease.

Pension increases within current expenditure have been limited, rising modestly from 1.014 trillion rupees in both the budgeted and revised 2024-25 estimates to 1.055 trillion rupees next year. This limitation is not attributed to employee contributions but to restricting re-employed retirees to choose between pension and salary. A reduction in subsidies, a typical IMF requirement, is also planned—from 1.378 trillion rupees in the revised estimates to 1.186 trillion rupees next year. This decrease is mainly due to an approximately 150 billion rupee reduction in power sector subsidies (based on projected savings from renegotiations with Independent Power Producers and cheaper commercial bank borrowing to address circular debt) and a 44 billion rupee reduction in subsidies for industries and production.

Subsidies exceeded the budgeted amount by about 15 billion rupees this year. The lower allocation in the 2025–26 budget could significantly overshoot by June 2026 if, as the IMF noted, “domestic political economy pressures to unwind and delay reforms remain present and may intensify.”

Other current expenditure components are contained, pending confirmation of whether the government has judiciously accepted IMF interventions and is relying on waivers or unexplored revenue sources, such as increased exports and remittances, to alleviate Fund concerns. Alternatively, the SBP might manage core inflation (possibly through manipulation) to adjust monetary policy and meet its budgetary targets.

Federal Board of Revenue (FBR) collections are budgeted to increase by 20% from the revised estimates, with 51.5% of total collections expected from indirect taxes (which disproportionately affect the poor). Petroleum levy, a sales tax on petrol and related products paid by the public, is projected to generate 1.468 trillion rupees next year, a 26% increase from the current year’s revised estimates. This levy is not categorized as an indirect tax to avoid sharing revenue with provinces.

Direct taxes are expected to continue accounting for 49% next year, largely through withholding taxes in the sales tax mode—an indirect tax—representing nearly 75-80% of all collections. Despite objections from the Auditor General of Pakistan, this source continues to be incorrectly classified as direct tax revenue. The 2025-26 budget anticipates increases in the following withholding taxes in sales tax mode, but categorized under direct taxes: (i) cash withdrawals by non-filers from 0.6% to 1.0%, (ii) dividend tax rate increases to 25% and 15% on mutual funds, (iii) specific services from 4% to 6%, (iv) a flat 15% rate on non-specific services, and (v) income from sports from 10% to 15%.

The FBR experienced a one trillion rupee shortfall in collections this year, and achieving next year’s target will be challenging. The customary post-budget technical briefing on the finance bill by the Chairman FBR was abruptly canceled, raising significant doubts about revenue forecasts for the upcoming fiscal year.

External resources are estimated at 5.777 trillion rupees for 2025-26, with loan repayments totaling 5.472 trillion rupees and short-term credit repayments at 199.8 billion rupees. Net inflows would thus be a mere 105.5 billion rupees, only 20 billion rupees less than the additional 84.99 billion rupees allocated to civil government operations next fiscal year compared to this year’s revised estimates. It remains unclear whether the budgeted allocation accounts for the 10% salary increase and 7% pension increase for 7% of the country’s workforce, funded by taxpayers.

The Benazir Income Support Programme is budgeted at 716 billion rupees—a 21% increase from 2024-25. However, with poverty levels at 44.2% according to the World Bank, this amount (compared to last year’s 592.383 billion rupees) is unlikely to significantly reduce poverty. The budgeted allocation for the Federal Public Sector Development Programme (PSDP) was 1400 billion rupees in the current year, revised down to 1.1 trillion rupees. The lower allocation of one trillion rupees for the upcoming year reflects a 28.5% decrease from the 2024-25 budgeted amount. The PSDP is typically reduced when fiscal constraints arise.