ISLAMABAD – S&P Global Market Intelligence forecasts the overall budget deficit to be 5.1 per cent of GDP, higher than the budget estimate of 3.9pc.
Similarly, real GDP growth has been projected at 3.6pc in fiscal year 2026, lower than the government target of 4.2pc.
The relief and targeted measures will, to some extent, shield the lower-to-middle income households and smaller businesses against cost-of-living pressures, especially as the inflation slowdown continues and overall consumer price inflation eases to 3.9pc and 6.3pc in calendar years 2025 and 2026, respectively. Large-scale manufacturing sector recovery is also projected to become more broad-based and entrenched, at 5.7pc in calendar year 2026.
Key highlights include: The commitment to fiscal consolidation in the budget announcement is broadly in line with expectations, given that the coalition government is seeking to continue progress under the IMF program. It will also allow access to concessional financing and rollovers of bilateral repayments from traditionally friendly countries, as well as other multilateral development institutions. The budget, therefore, improves the likelihood that Pakistan will stay on course with the IMF programs, receiving timely disbursements.
However, this will be dependent on the coalition government’s implementation of the above-mentioned revenue-raising measures. Furthermore, there is no likelihood of widespread civil society opposition to these revenue-raising measures if implemented, especially for the carbon tax on fuel; sporadic and localised protests would remain likely in some cities.
The revenue target appears ambitious, however, and has historically been underachieved. The revenue generation shortfall will encourage under-utilisation of the already-reduced development spending allocation, with current expenditures, particularly defence and interest, being given higher priority.
The higher defence spending allocation, although expected in the aftermath of recent military escalation, will result in constrained spending for other critical sectors such as education and health. The additional budget is almost certain to be disbursed towards the acquisition of more military equipment and arms, and ammunition, as military personnel payments are not calculated as part of the defence budget. New defence acquisition is most likely to include purchases of fighter jets and ballistic missile defence systems, among others.
One concern is that the announced taxation measures are heavily reliant on indirect channels, which will keep inflationary expectations strong, with businesses likely to pass on the impact to consumers through higher prices. Tax policies targeting the wholesale and retail segments are also likely to underperform, given the high share of undocumented economic activity in the segments. This will potentially adversely impact revenue growth and widen the fiscal deficit beyond the target.
