Pakistan's plan to sharply increase growth faces headwinds — analysts

Arab News

a day ago

ISLAMABAD: Pakistan is aiming to sharply increase economic growth under its annual federal budget unveiled on Tuesday, but analysts are skeptical about the country's ability to meet its ambitious goals.
The budget targets higher revenues and a steep fiscal deficit cut under International Monetary Fund (IMF) backed reforms. Yet, defense spending was hiked 20 percent, excluding military pensions, after last month's conflict with India.
Finance Minister Muhammad Aurangzeb said in a post-budget press conference on Wednesday that customs duties have been cut or removed on thousands of raw materials and intermediate goods.
'Industry here has to be competitive, competitive enough to export,' he said.
But growth drivers remain unclear. The government is targeting 4.2 percent GDP growth in fiscal 2026, up from 2.7 percent this year, which was revised down from an initial 3.6 percent as agriculture and large-scale manufacturing underperformed.
'Pakistan's GDP growth projection of 4.2 percent appears ambitious given recent performance, and overly optimistic assumptions may place tax targets out of reach,' said Callee Davis, senior economist at Oxford Economics.
Pakistan's past growth spurts were consumption-led, triggering balance-of-payments crises and IMF bailouts. The government says it now wants higher-quality, investment-driven growth.
Aurangzeb said structural reforms are underway, pointing to East Asia-style pro-market transitions. 'This is an East Asia moment for Pakistan,' he said.
'BUDGET KEEPS IMF HAPPY'
The 17.57 trillion rupee ($62.24 billion) budget comes as Pakistan remains under a $7 billion IMF program. Revenues are projected to rise over 14 percent, driven by new taxes and broadening the tax base. The fiscal deficit is targeted at 3.9 percent of GDP, down from this year's 5.9 percent.
Key reforms include taxing agriculture, real estate, and retail, and reviving stalled privatizations. But revenue shortfalls this year have raised doubts, with both agriculture income tax and retail collections missing targets. Only 1.3 percent of the population paid income tax in 2024, government data shows.
'Pakistan's budget keeps the IMF and investors happy, even if it comes at a near-term cost to growth,' said Hasnain Malik, head of equity strategy at Tellimer.
'The political setup, with the military firmly in charge, also lowers the risk of protests.'
While overall spending will fall 7 percent, defense will rise after the worst fighting between the nuclear-armed neighbors in decades. Including pensions, defense spending will total $12 billion, 19 percent of the federal budget or 2.5 percent of GDP, matching India's share, per World Bank data.
The hike was enabled by a sharp drop in interest payments, as the central bank cut policy rates from 22 percent to 11 percent over the past year, easing domestic debt servicing costs. Aurangzeb said cuts in subsidies also helped create fiscal space.
($1 = 282.3000 Pakistani rupees)