How is Pakistan raising money for a 20 percent hike in defence spending?

Yahoo

a day ago

Islamabad, Pakistan – Pakistan has increased its defence spending by more than 20 percent – the most substantial hike in a decade – following last month's military confrontation with neighbouring India.
Presenting the annual federal budget on June 10, Finance Minister Muhammad Aurangzeb proposed an allocation of 2.55 trillion rupees ($9bn) for the country's three armed services – the army, air force and navy – amounting to 1.97 percent of Pakistan's gross domestic product (GDP), up from 1.7 percent in the previous budget.
'The security situation in the country is precarious, and the armed forces have rendered commendable service in protecting the borders,' Aurangzeb said during his speech, as India has threatened to carry out strikes if armed groups carry out attacks on India or Indian-administered Kashmir.
But analysts say that Islamabad will need to walk a fine balance in spending more on defence at a time when its fragile economy is under strict oversight from the International Monetary Fund (IMF), and cuts in social sector expenditure could embolden the opposition.
On May 7, India carried out missile strikes on what it called 'terrorist infrastructure' in Pakistan and Pakistan-administered Kashmir after blaming Islamabad for backing fighters responsible for the killing of 26 people in Indian-administered Kashmir's Pahalgam town on April 22.
Pakistan denied involvement in the Pahalgam attacks, demanding a 'credible, transparent, independent' investigation. Islamabad said innocent civilians were killed in India's attacks on May 7.
Tensions escalated after the two nuclear-armed neighbours engaged in tit-for-tat missile and drone attacks over four days, primarily targeting each other's military installations.
By the time a ceasefire was announced by United States President Donald Trump on May 10, in excess of 70 people had been killed – more than 50 in Pakistan and at least 20 in India.
Against that backdrop, Pakistan's defence hike was expected, say analysts. India, which presented its budget before the conflict, also increased its defence spending to $78.7bn, a 9.5 percent rise from the previous year.
But unlike India, Pakistan has more than a neighbour to keep an eye on: It also confronts pressure from the IMF. The IMF approved a 37-month, $7bn loan programme for Pakistan last September, its 25th since 1958. The most recent tranche of $1.3bn was released in May this year, a day before the ceasefire between India and Pakistan took place. But in exchange, the global lender has been pressuring Pakistan to streamline its expenditure, reduce subsidies and improve the efficiency of its governance structures.
Pakistan appears to have paid heed to those demands from the IMF. Even as its defence spending has gone up substantially, its overall budget for the next fiscal year has been reduced to 17.57 trillion rupees ($62bn), marking a 6.9 percent decrease from last year.
The defence spending hike, while massive, is in line with growing defence allocation in recent years. The military's budget has nearly doubled in the past five years. In fiscal year 2020-21, the allocation stood at 1.28 trillion rupees ($4.53bn).
The army, long seen as the most powerful institution in Pakistan's defence and political spheres, has received 1.17 trillion rupees ($4.1bn), accounting for nearly 46 percent of the total defence budget. The air force and navy received just more than 520 billion rupees ($1.8m) and 265.9 billion rupees ($941m), respectively.
Pakistan's military budget increase also reflects a broader global trend. A report published in April by the Stockholm International Peace Research Institute (SIPRI), which specialises in conflict and arms control research, stated that global military expenditure reached $2.7 trillion in 2024, a 9.4 percent increase from the previous year and the 'steepest year-on-year rise since the end of the Cold War'.
Hina Shaikh, a Lahore-based economist with the International Growth Centre (IGC), said the increase in Pakistan was expected and reflects the government's continued prioritisation of security amid geopolitical tensions and domestic instability.
'While understandable from a strategic lens, this increase does come when economic recovery is just beginning to happen, but still fragile, inflation is easing and fiscal space is constrained,' she told Al Jazeera.
Ali Hasanain, an economics professor at the Lahore University of Management Sciences (LUMS), called the hike in defence spending both 'inevitable and necessary' but warned against sacrificing long-term development.
'The only way out of this dilemma for Pakistan is to undertake deep structural reforms of the sort which no government has shown a commitment to yet, so that both the economy and defence spending can stay robust over the medium and long terms,' Hasanain said.
While most analysts agree that the defence spending hike is a fallout of the May conflict, a major challenge for the government is to fund it without compromising the social welfare, health, or education sectors.
Due to Pakistan's sizable external debt, recorded at $87.4bn according to the latest government figures, the largest share of the national budget is consumed by debt servicing, which stands at $29bn, which is almost 47 percent of total expenditure.
In the budget announced on Tuesday, Pakistan's government has cut subsidies. The budget also outlines plans to expand the tax base, removes exemptions, and introduces new taxes to raise public revenue.
The opposition party of jailed former Prime Minister Imran Khan dubbed the budget 'anti-people' and 'crafted for the elite.'
The Pakistan Tehreek-e-Insaf (PTI), the opposition party said on Wednesday that the budget provided no real relief to the public, as government staff salary raises were low and agriculture, the mainstay of the country's economy, witnessed decline.
Sajid Amin Javed, a senior economist at the Sustainable Development Policy Institute (SDPI), said that the combination of a decline in the interest payments Pakistan owes its debtors this year, and the cut in subsidies had provided the government 'some fiscal space'.
Still, others highlighted that Pakistan's defence spending, while the highest in South Asia as a percentage of GDP, has declined in relative terms compared to past decades as it has been forced to set money aside to repay loans.
Hasanain of LUMS said that Pakistan now spends less, as a percentage of GDP, than countries like Singapore (2.8 percent), Greece (3.1 percent), Poland (4.2 percent), or the United States (3.4 percent), and nearly three times less than Saudi Arabia (7.3 percent), Russia (7.1 percent), or Israel (8.8 percent).
But he pointed out that Pakistan also collects far less tax than most other countries, so the defence spending hike still eats up a giant chunk of the government's revenue. 'A low tax to GDP ratio means that defence spending is a bigger burden for the government in Pakistan than most other countries in the world.'
The last few years have been deeply turbulent for Pakistan's economy. Foreign reserves fell to just under $3bn in 2023, bringing the country of 250 million people to the brink of default.
Foreign reserves have since risen to $11bn following IMF deals.
Similarly, the Pakistani rupee, having lost more than 60 percent of its value against the US dollar over the last two years, has now stabilised between 280 and 282 rupees per dollar.
Javed of SDPI says these indicators show Pakistan's macroeconomic fundamentals are stabilising, but the public impact remains uncertain.
'It is a budget of stabilisation, made in consultation with the IMF, to ensure that the country's revenue, growth and fiscal deficit targets are met. But on the whole, it remains a traditional budget, with no deep-rooted structural changes or strategic change visible, at least for now,' he said.
Economist Shaikh argued that the budget lacks inclusive or pro-poor reforms and shows limited investment in sectors like health and education.
'This may be called a technocrat's budget under IMF constraints, fiscally conservative, tax-heavy, and focused on short-term stabilisation. It is focused on restoring macroeconomic stability, controlling inflation, and building reserves,' she said.
Hasanain, however, says that the IMF principally concerns itself with helping countries move back towards stability, and does not consider long-term, sustainable growth as its purview.
'By cutting expenditures and running primary budget surpluses, the government is indeed moving out of the acute debt crisis it found itself in two years ago, but the larger project of correcting longstanding structural deficiencies is, despite receiving some lip service, largely neglected to date,' he said.
'Given the lack of any serious political opposition, this excessive caution towards reform is deeply frustrating.'
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