Budget 2025–26: Holding the line on economic stability

As Pakistan finalises its federal budget 2025-26 budget, analysts broadly agree that the government is under firm pressure to deliver on its commitments to the International Monetary Fund (IMF) by demonstrating a clear path to fiscal consolidation and primary surplus.

The budget, projected to carry an expenditure of Rs16.9 trillion, is being shaped in the context of fiscal constraints and IMF oversight. Policymakers face the challenge of balancing reform with limited relief, while maintaining the confidence of external creditors.

The IMF’s dual-programme structure, comprising the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF), continues to shape fiscal strategy. Under these arrangements, the government is expected to prioritise discipline, broaden the tax base, and scale back untargeted subsidies.

With the Federal Board of Revenue (FBR) assigned a target of Rs14.3 trillion, authorities are focusing on tax expansion, documentation, and maintaining a primary surplus. The budget reflects a focus on structural reform and expanding the tax base, in line with IMF benchmarks.

Walking a fiscal tightrope

Vaqar Ahmed, an independent economist, emphasised the need for disciplined public finances. “We need a primary surplus, which means we will have to continue with robust revenue mobilisation and discipline on the expenditure side. The government will have to maintain quite disciplined spending and there’s no room for wastages.”

He specifically called for the shelving of “look-good” projects such as large-scale civil works and urged the rationalisation of untargeted subsidies. “Right now is not the time for ‘look-good’ projects, nor for large-scale announcements in the budget. Untargeted subsidies should be rationalised.”

The government’s Federal Board of Revenue (FBR) target of Rs14.3 trillion is seen as overly ambitious. According to Sana Tawfik, Head of Research at Arif Habib Limited, “The government’s target is around Rs14.3 trillion… so, we are expecting that there will be a shortfall, and the total FBR collection… will be around Rs13.9 trillion”.

On the expenditure side, lower interest rates are expected to provide some breathing room. “We will get some support from the lower interest rates on the markup payment side,” she said. “We are expecting Rs8.5 trillion [in markup payments] next year. The government’s numbers being mentioned are around Rs8.7 trillion. So our expectation is slightly lower than the numbers being mentioned in the budget.”

This balancing act, between IMF-mandated austerity and mounting public service costs, is shaping up to be the defining challenge of budget FY26. Additional fiscal room may be found only through strict enforcement of expenditure discipline and credible revenue-enhancing measures.

Tax push, an uphill battle

Analysts anticipate an aggressive expansion of Pakistan’s tax net in the FY26 budget, with the FBR likely to miss its ambitious target of Rs14.3 trillion. Tawfik said: “We are expecting that there will be a shortfall, and the total FBR collection […] will be around Rs13.9 trillion”.

To bridge the gap, a series of new measures is being proposed. Tawfik detailed several items under discussion, including a 3% General Sales Tax (GST) on petroleum, expected to generate Rs147 billion, a 25% increase in Federal Excise Duty (FED) on tobacco products projected to yield Rs100 billion, and a proposed pension tax estimated to raise Rs55 billion.

Additionally, the removal of tax exemptions for FATA and PATA is expected to contribute Rs35 billion to revenue. “If all are implemented, they total Rs869 billion,” she said, adding that this would still leave a shortfall of around Rs439 billion against the Rs14.3 trillion target.

She also said that a phased withdrawal of the super tax is under review: "One proposal suggests phasing it out gradually — 3% in the first year, another 3% the next, and 4% in the third — eliminating it by FY28. If implemented, it would benefit the overall economy, particularly companies."

Supporting this view, Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company, said: “The budget should focus on bringing new individuals and areas under taxation to increase revenue. Super tax on companies should also be phased out”.

Meanwhile, Ahfaz Mustafa, CEO of Ismail Iqbal Securities, warns that the revenue drive may rely heavily on regressive indirect taxation. “The budget will be a mixed bag with a lowering of direct taxation and a slight increase in indirect taxation,” he said.

“I don't see any out-and-out relief for taxpayers, because whatever relief they get on lower income tax will be compensated by higher indirect taxes like GST or PDL (Petroleum Development Levy).”

He further noted that the Fund has pressed for the removal of preferential tax regimes, such as those for FATA/PATA and SEZs (Special Economic Zones): “As per the IMF staff report, these subsidies have to end over time and whether the government takes action on it or not is going to be crucial”.

Amreen Soorani, Head of Research at Al Meezan Investment, also said that taxation reform would be a central pillar of IMF compliance. “A central focus will be the government’s new tax measures, the key to achieving the IMF-backed target of a nearly Rs2 trillion (16% YoY) revenue increase,” she said. “The budget's stance on non-filers, specifically, the potential lack of provisions for them, will also be a significant factor”.

Collectively, these measures underscore the government’s commitment to fulfilling IMF revenue benchmarks, albeit with rising concern over the burden this will place on compliant sectors and low-income households.

Uneven outcomes across sectors

As the government moves to align the next fiscal budget with IMF expectations, proposed tax and regulatory changes are likely to produce mixed outcomes across key economic sectors. Analysts point to several industries that stand to benefit, while others brace for challenges.

In the auto sector, the government is reportedly planning to extend the age limit for used car imports from three to five years. While this would benefit consumers by expanding access to lower-cost options, it is expected to undermine the domestic industry.

“For autos, overall, the proposals seen so far appear negative,” said Tawfik. “For instance, in the IMF report, there was talk of increasing the age limit for imported used cars… if that happens, it would be negative for local auto assemblers”.

Construction-linked sectors are likely to benefit from housing initiatives. “There’s talk of announcing a low-cost housing scheme, with about 200,000 low-cost housing units proposed, along with talk of subsidised mortgage financing,” Tawfik added.

“Both these are positive for the cement sector. And of course, since the cement sector is part of construction, this would also be positive for its allied sector, steel.” She further noted that removing tax exemptions for FATA/PATA “would be positive for the local steel industry”.

Technology firms may gain from the continuation of reduced tax rates on exports. “Currently, there is a reduced withholding tax of around 0.25% on IT exports. That is set to expire in June 2026, by the end of the upcoming fiscal year. The proposal is to extend it — and if that happens, that would be quite positive for the overall tech sector,” she said.

The outlook for textiles is cautiously optimistic. She explained that a return to the fixed tax regime is being considered: “For textiles — the proposal is that after having been placed under the normal tax regime last year, they should now be brought back under FTR. So, if they return to FTR that would be positive for the textile sector.” However, she also warned that concurrent increases in sales tax could negate the benefit.

In the energy sector, the budget may introduce reforms to address mounting circular debt, which would be credit-positive for the sector. Yet, these changes are likely to increase costs for consumers. “Efforts should be made to somehow reduce the costs of the energy sector so that the burden on the consumer can gradually be eased,” said Ahmed.

Ahsan Mehanti, Managing Director of Arif Habib Commodities, highlighted looming uncertainty for several segments. “There is uncertainty over [an] IMF-driven federal budget expected to be challenging for industrials, exporters, auto, oil and fertiliser sectors,” he said.

“Sales tax increase on exporters, increase in PDL for the oil sector, FEDs revision on fertiliser sales, unfreeze of auto imports — all remain in play”. He also flagged pending decisions: “Government is yet to take key decisions upon IMF approval, mainly for the real estate package, PSDP and pensions that will impact growth numbers and budget outlay”.

Limited relief, targeted welfare

Analysts anticipate that the budget will offer minimal broad-based relief for the public, with targeted welfare allocations shaped by fiscal constraints and IMF oversight.

Dr Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute (SDPI), identified the Benazir Income Support Programme (BISP) as the only major safety net expected to expand in the coming year.

“One area where relief might be provided is the BISP — for which an allocation of about Rs700 to Rs725 billion has been proposed,” he said. He noted this would likely be linked to inflation, offering limited cushioning for vulnerable households.

However, relief for the salaried middle class appears unlikely, unless revenue outcomes improve significantly. “Whether relief can be provided to the salaried class or not will depend on how the final numbers turn out,” Dr Suleri remarked, noting the tight fiscal envelope the government is operating within.

Energy prices are also expected to continue rising, which could worsen structural inefficiencies. “On one hand, as energy prices rise, people will increasingly move towards off-grid solutions,” Suleri explained.

“But if they stay on off-grid solutions, then capacity payment charges will continue to increase — so this issue will keep persisting,” he said, pointing to the long-term burden of circular debt that such trends aggravate.

In short, with limited fiscal room and tough IMF benchmarks, Budget FY26 is poised to prioritise economic stabilisation over populist relief, offering constrained support to only the most vulnerable.

Green goals vs fiscal realities

The budget presents a web of internal contradictions and political sensitivities, particularly as it aims to reconcile green energy ambitions with fiscal sustainability and expand taxation amid resistance from entrenched sectors.

Dr Suleri drew attention to a fundamental contradiction within the IMF’s dual programming. “There is a bit of contradiction between the climate resilience fund and the Extended Facility programme — where, on one hand, we are talking about promoting renewable energy, and on the other hand… renewable energy will also cause capacity payment charges and circular debt to increase,” he explained.

This tension is prompting the government to reconsider its solar incentives: “Any kind of incentive previously given to consumers on solar meters may no longer be provided”.

On the climate front, Suleri confirmed that a carbon tax, previously shelved in 2009–10 due to legal and political resistance, is being revived and applied to fuel. “In this budget, for the first time, a carbon levy or carbon tax is being introduced successfully,” he said, noting that earlier attempts had failed “due to opposition and a court judgment”.

The political economy of tax reform also remains fragile. Ahmed warned that provincial lag in taxing services and agriculture, which together comprise over half of Pakistan’s GDP, continues to erode the national revenue base.

“The provinces need to work very hard. If you look, they have the entire services sector — but they are not generating tax from services in the manner they should… they should collect tax, at least from the large farmers,” he stated.

Meanwhile, public resistance to regressive taxation is a real risk. Mustafa cautioned that the composition of the revenue effort would skew towards indirect taxes. “Whatever relief [the public] gets on lower income tax will be compensated by higher indirect taxes like GST or PDL,” he said, describing the budget as a “mixed bag” tilted toward compliance with IMF benchmarks rather than distributive fairness.

Compliance first, relief later

Analysts say the fiscal document is designed to meet IMF conditions above all else, often at the expense of broader public relief or structural reform.

“This year’s budget should help us keep the IMF programme on track,” said Ahmed, underscoring that Pakistan’s stabilisation goals would define both revenue and expenditure strategy. “The government will have to maintain quite disciplined spending — there’s no room for wastages,” he added.

Despite scattered sectoral incentives and climate-linked spending under the Resilience and Sustainability Facility (RSF), the dominant thrust of the budget remains fiscal consolidation under the Extended Fund Facility (EFF). “Whatever relief [the public] gets on lower income tax will be compensated by higher indirect taxes like GST or PDL,” said Mustafa, highlighting the regressive tilt of the expected tax framework.

Only select sectors — particularly those aligned with climate objectives like cement and technology — are expected to benefit. “There’s talk of announcing a low-cost housing scheme, with about 200,000 low-cost housing units… both these are positive for the cement sector,” said Tawfik. She also noted that extending the 0.25% WHT (withholding tax) on IT exports would “be quite positive for the overall tech sector”.

Meanwhile, BISP remains the centrepiece of the government’s public relief architecture. “That's one area where relief might be provided and an allocation of about Rs700 to Rs725 billion has been proposed for the programme,” said Suleri.

The FY26 budget, therefore, marks not just another economic blueprint, but a test of Pakistan’s ability to sustain stabilisation.