Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy may enter a new, perhaps decisive, phase when the Federal Finance Minister, Muhammad Aurangzeb, presents the annual budget for fiscal year (FY) 2025–26 on June 10, 2025, at a time when macroeconomic indicators are showing early signs of stabilization, though structural vulnerabilities still require pragmatic policy interventions. The upcoming budget is expected to define the trajectory of economic reform and public confidence, especially as the country seeks to balance fiscal restraint with targeted relief measures.
The anticipated reduction in overall expenditure, prompted by easing debt servicing costs due to a substantial drop-in policy rate, offers the government a rare window to shift its fiscal priorities. Composition of the budget will carry deep implications for creating employment, inflation control and investment recovery, aligning it as a strategic tool not only for economic management but also for shaping national direction in a post-adjustment environment.
Conclusion of recent IMF’s staff visit to Islamabad, led by Nathan Porter, showed a critical development in Pakistan’s economic roadmap. Discussions between IMF and Pakistan reflected a strong alignment to the importance of fiscal consolidation while ensuring protection for social and priority expenditures. The authorities reaffirmed their commitment to a primary budget surplus target of 1.6 percent of GDP in FY2026, signaling a clear intent to maintain fiscal discipline.
The IMF emphasized actions to enhance revenue mobilization, particularly by expanding the tax base and improving compliance mechanisms. Integration of targeted expenditure prioritization and reinforcement of administrative capacity were identified as pivotal elements for the forward movement of fiscal framework.
The IMF recognized the importance of anchoring inflation within the central bank’s medium-term target range of 5–7 percent, stressing continuation of a tight and data-dependent monetary policy, emphasizing the need to rebuild foreign exchange reserve buffers and preserve a market-determined exchange rate regime to strengthen resilience against external shocks.
The consensus reflected during the mission reinforces investor confidence paving the way for continued financial support and technical collaboration between Pakistan and IMF. Similarly, the IMF Executive Board’s decision to complete the first review of the Extended Fund Facility (EFF) and approve Pakistan’s request for an arrangement under the Resilience and Sustainability Facility (RSF) marked a milestone in Pakistan’s reform journey.
Disbursement of approximately US$ one billion (SDR 760 million) under EFF brings total disbursements to about US$2.1 billion (SDR 1.52 billion), providing critical support on external account. IMF further approved Pakistani authorities’ request to access an additional US$1.4 billion under the RSF, designed to strengthen climate resilience and sustainability.
The IMF Executive Board recommended meeting all seven quantitative performance criteria for end-December 2024, including those related to net foreign exchange reserves, primary budget deficit, SBP’s forward book, and cash transfer spending.
The structural benchmarks agreed upon include parliamentary approval of the FY2026 budget aligned with IMF targets, implementation of agricultural income tax, and publication of a governance action plan by October 2025. The monetary and financial sector benchmarks include development of a post-2027 strategy to ensure long-term financial stability, and reforms in the energy sector such as timely tariff adjustments and legislation for captive power levies.
The IMF programme also requires legal amendments to ensure adequate debt service financing and calls for a national fiscal pact that promotes devolution and provincial discipline. The trade-related benchmarks include submission of legislation to remove quantitative restrictions on used vehicle imports and gradual phasing out of incentives for special economic zones by 2035. Commitment to these reforms underlines Pakistan’s effort to transition from stabilization to sustained growth and resilience.
The IMF Executive Board has also stressed that Fund’s disbursements are credited to the central bank reserves and are not available for budgetary support, which places an even greater responsibility on domestic revenue generation and expenditure rationalization.
Emphasis on climate-linked reforms under RSF further broadens the programme’s strategic scope, tying financial support to long-term sustainability goals such as energy transition, water management, and green infrastructure.
Budget FY2025–26 offers Pakistan a rare opportunity to align fiscal strategy with structural reform and socio-economic transformation. The need to balance austerity with development is critical. The government must maintain its commitment to fiscal responsibility while ensuring that the budget delivers meaningful public relief, particularly for the salaried class and vulnerable households.
Proposed reduction in super tax rates and rationalization of income tax brackets for middle-income earners must be accompanied by tangible investments in health, education, and social protection. Indexing tax brackets to inflation can offer lasting relief to the salaried population while preserving revenue neutrality. Broader tax base must be achieved through enforcement, digitization, and incentivizing formalization rather than increasing burden on compliant taxpayers.
Allocation for defence must reflect the prevailing regional security environment and Pakistan’s strategic needs without crowding out development spending. The recent escalation of tensions in South Asia and the continued importance of national security justifies a strong but measured defense budget.
The government must ensure that defence expenditure is efficient, technology-oriented, and strategically aligned to long-term modernization goals. The budget must also protect critical social programmes such as the Kafaalat unconditional cash transfer scheme, whose inflation-linked adjustments are essential to maintain real purchasing power for the poorest households.
Continued support for the Ehsaas and Benazir Income Support Programme, if properly targeted and digitally administered, can offer both fiscal efficiency and political legitimacy.
Public sector development programme (PSDP) must prioritize high-impact, shovel-ready projects that yield quick economic returns and create employment. Integration of climate resilience into PSDP projects, especially in transport, water, and renewable energy, can position Pakistan as a regional leader in sustainable development.
The budget must also focus on reforms of state-owned enterprises, improvement in procurement transparency, and digitization of revenue collection systems.
The Federal Board of Revenue (FBR) must invest in big data analytics, blockchain-based invoice matching, and AI-driven audit selection to strengthen compliance and minimize leakages. Inclusion of retail and informal sectors in the tax net through tools such as the Tajir Dost scheme and digital invoicing can unlock vast untapped revenues without legislative overreach.
The monetary policy stance must remain cautious and adaptive. State Bank of Pakistan must continue anchoring inflation expectations while supporting credit flow to the private sector. The financial sector strategy must prioritize banking inclusion, small and medium enterprises (SMEs) financing, and Islamic banking expansion to deepen financial access and resilience.
The government must also maintain a market-determined exchange rate and avoid administrative interventions that distort trade competitiveness and reserve management. Rebuilding of foreign exchange reserves and maintenance of a credible forward book are essential to shield the economy from external vulnerabilities.
The upcoming budget will also need to clearly communicate its objectives, measures, and benefits to the public. The government must invest in budget literacy, citizen engagement, and digital transparency tools to enhance trust and participation. Publishing a citizens’ budget, regular town halls, and public dashboards on budget implementation can build confidence and accountability. The budget narrative must emphasize that reform is not a burden but a pathway to a stronger, fairer, and more self-reliant Pakistan.
The road to sustainable growth demands consistency, courage, and clarity. IMF-supported reform programme provides a framework, but the national will and institutional capability must deliver the outcome. The upcoming fiscal year must not only be remembered for balancing books but for restoring national ambition for self-reliance and prosperity for all. Budget for FY2025–26 must be the beginning of a new economic contract between the state and the people, one based on opportunity, equity, and shared responsibility.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.