Pakistan's plan to sharply increase growth faces headwinds, analysts say

Zawya

a day ago

Pakistan is aiming to sharply increase economic growth under its annual federal budget unveiled on Tuesday, but analysts are sceptical 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, defence spending was hiked 20%, 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% GDP growth in fiscal 2026, up from 2.7% this year, which was revised down from an initial 3.6% as agriculture and large-scale manufacturing underperformed.
'Pakistan's GDP growth projection of 4.2% 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.
The 17.57 trillion rupee ($62.24 billion) budget comes as Pakistan remains under a $7 billion IMF programme. Revenues are projected to rise over 14%, driven by new taxes and broadening the tax base. The fiscal deficit is targeted at 3.9% of GDP, down from this year's 5.9%.
Key reforms include taxing agriculture, real estate, and retail, and reviving stalled privatisations. But revenue shortfalls this year have raised doubts, with both agriculture income tax and retail collections missing targets. Only 1.3% 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%, defence will rise after the worst fighting between the nuclear-armed neighbours in decades. Including pensions, defence spending will total $12 billion, 19% of the federal budget or 2.5% 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% to 11% over the past year, easing domestic debt servicing costs. Aurangzeb said cuts in subsidies also helped create fiscal space. ($1 = 282.3000 Pakistani rupees)
(Reporting by Ariba Shahid in Islamabad; additional reporting by Karin Strohecker in London; Writing by Ariba Shahid and Saeed Shah; Editing by Kim Coghill)