Pakistan likely to hike defence spending but slash overall budget

Free Malaysia Today

18 hours ago

Analysts said they expect Pakistan to increase its defence budget by around 20%, likely offset by cuts in development spending. (EPA Images pic)
ISLAMABAD : Pakistan will unveil its annual federal budget for the coming fiscal year later today, seeking to kickstart growth while finding resources for an expected hike in defence expenditure following the conflict with India last month.
Islamabad will also have to contend with remaining within the discipline of its International Monetary Fund programme and the uncertainty from new trade tariffs being imposed by the US, its biggest export market.
Media reports say the government is likely to present a Rs17.6 trillion (US$62.45 billion) budget for the fiscal year beginning July 1, down 6.7% from this fiscal year.
It has projected a fiscal deficit of 4.8% of GDP, against a targeted 5.9% deficit in 2024-25, the reports say.
Analysts said they expect an increase of around 20% in the defence budget, likely offset by cuts in development spending.
Pakistan allocated Rs2.1 trillion (US$7.45 billion) for defence in the outgoing fiscal year, including US$2 billion for equipment and other assets.
An additional Rs563 billion (US$1.99 billion) was set aside for military pensions, which are not counted within the official defence budget.
India's defence spending in its 2025–26 (April-March) fiscal year was set at US$78.7 billion, a 9.5% increase from the previous year, including pensions and US$21 billion earmarked for equipment.
It has indicated it will step up expenditure following the May conflict with Pakistan.
The government of Pakistani Prime Minister Shehbaz Sharif has projected 4.2% economic growth in 2025-26, saying it has steadied the economy, which had looked at risk of defaulting on its debts as recently as 2023.
Growth this fiscal year is likely to be 2.7%, against an initial target of 3.6% set in the budget last year.
Pakistan's growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8% and 6.0% growth is expected in 2025, according to the Asian Development Bank.
Rate cuts not enough
Expansion of the economy should be aided by a sharp drop in the cost of borrowing, the government says, after a succession of interest rate cuts by the central bank.
However, economists warn that monetary policy alone may not be enough, with fiscal constraints and IMF-mandated reforms still weighing on investment.
Finance minister Muhammad Aurangzeb said yesterday that he wanted to avoid Pakistan's boom and bust cycles of the past.
'The macroeconomic stability that we have achieved, we want to absolutely stay the course,' he said.
'This time around we are very, very clear that we do not want to squander the opportunity,' he added.
The budget is expected to prioritise expanding the tax base, enforcing agriculture income tax laws, and reducing government subsidies to industry, to meet the terms of a US$7 billion IMF bailout signed last summer.
Just 1.3% of the population paid income tax in 2024, according to the tax authorities, with agriculture and the retail sector largely outside of the tax net.
The IMF has urged Pakistan to widen the tax base through reforms which include taxing agriculture, retail, and real estate.
Ahmad Mobeen, senior economist at S&P Global Market Intelligence, said that he expected the revenue target for 2025-2026 will be missed.
'The shortfall will mostly be owing to lack of optimal implementation of announced measures as well as absence of meaningful structural reforms to widen the tax net in general,' said Mobeen.