Federal budget-making in Pakistan, when the country is in an IMF programme (and mostly it is in an IMF programme) is comparatively easy.
The government commits to revenue, fiscal deficit and net foreign exchange reserve targets with the IMF through signing a Memorandum of Economic and Financial Policies (MEFP). Those targets get translated into quantitative performance criteria and indicative targets – and the budget becomes an arithmetic exercise to balance the equation. However, this time the budget makers also have to consider international energy prices that are assumed to remain high for the next six to eight months, even if the war ends tomorrow.
The good news is that the IMF’s latest review and the numbers released by the State Bank of Pakistan confirm that the macroeconomy is better than last year. The IMF says the programme is on track, with all seven quantitative performance criteria met at the end of December. The State Bank’s reports real GDP growth of 3.8 per cent in the first half of FY26 (July to December 2025), compared with 1.9 per cent in the same period last year. The current account balance for July to March 2026 was almost flat at $8 million. Net SBP liquid reserves are expected to reach $18 billion by June after Eurobond proceeds.
Incidentally, the Gulf crisis started when the first eight months of the current fiscal year had already passed, so the real impact of the war will be reflected in our economy in the next fiscal year, starting from July 1.
The worrying news for inflation-hit consumers is that the MEFP signed by the government (released by the IMF on May 14) reflects that the budget will offer limited relief and regular energy price adjustment.
Pakistan has committed to delivering an underlying primary surplus of 2.0 per cent of GDP next year. This means the government must collect more in revenue than it spends on regular expenses, before counting interest payments. Parliament’s approval of a budget framework agreed with IMF staff is also a formal programme benchmark. So, the budget cannot be built around broad relief. Bigger salary increases, tax breaks, blanket fuel or electricity subsidies, and new development schemes will be possible only if the government can afford them without breaching this surplus target.
To meet the surplus target, tax collection will be at the heart of the next budget. The government has promised the IMF that it will raise additional revenue equal to 0.3 per cent of GDP in FY27 through permanent tax measures and stricter enforcement. About half is expected to come from reducing tax exemptions and concessions in income tax and sales tax. The rest is expected from reforms inside the FBR, including tighter audits, digital invoicing and better monitoring of businesses. As per the MEFP, the government has set a formal target for the FBR to collect Rs7,022 billion by the end of December 2026.
The FBR expects stronger risk-based audits to bring in Rs92 billion in FY27, digital invoicing to bring in Rs46 billion, and production monitoring to bring in Rs48 billion. Sugar, cement, tobacco and fertiliser are already within the production monitoring net, while textiles and beverages are to be fully monitored by the end of October 2026. Active sales tax taxpayers are expected to adopt digital invoicing by July 31. The informal economy will face more pressure through systems, data, and penalties.
The provinces will also be under pressure to collect more taxes. As per the MEFP, provincial budgets for FY27 are expected to raise additional revenue equal to 0.3 per cent of GDP. This will mainly come from expanding sales tax on services and enforcing higher agricultural income taxes on farm earnings. This measure will spare salaried workers and fuel consumers from an additional tax burden.
The MEFP also shows how much more the government can spend. Most day-to-day government expenditure is expected to grow no faster than inflation, projected at 8.4 per cent. The development budget is also likely to look different this year. Less than 10 per cent of PSDP funds are expected to go to new projects, as the government aims to use limited resources to complete schemes already underway. This means fewer new announcements and a greater focus on finishing unfinished projects rather than spreading money across too many schemes at once.
There will be some protection for the poorest. The MEFP commits the FY27 budget to creating space to raise Benazir Income Support Programme Kafaalat quarterly payments from Rs14,500 to Rs18,000 starting January 2027. It also says Kafaalat will cover 10.2 million families by the end of FY26. Health and education spending is also targeted at Rs4,227 billion in FY27.
The subsidy architecture is also changing. Pakistan has committed to replacing the tariff differential subsidy and cross subsidy system with targeted support for low-income electricity consumers through BISP. Electricity consumers are to be linked to the NSER database, with validity checks targeted for completion by the end of November 2026, before eligibility is set. This can improve targeting, but it will create political friction if households that previously benefited from category-based protection do not qualify under the new system.
Fuel relief will remain limited. The number shows how expensive even temporary relief has become. The government financed a delay in fuel price revision amid the US-Iran war through Rs152 billion in spending cuts, including a Rs100 billion cut in PSDP, a 20 per cent cut in fourth-quarter non-salary expenditure, lower official fuel allowances, and Rs25 billion in SOE grants. It has now committed to fully aligning domestic fuel prices with international prices, with fortnightly adjustments. Petrol relief will therefore have to be paid either through cuts elsewhere or through targeted provincial support for vulnerable households.
Electricity and gas bills are likely to remain under pressure in the next fiscal year. The MEFP commits to regular adjustments to electricity and gas prices rather than delaying them for extended periods. Electricity tariffs will continue to be revised through quarterly and monthly adjustments, while gas prices are scheduled for revision on July 1, 2026 and February 15, 2027.
The government has also capped the FY27 power subsidy at Rs830 billion, while gross power circular debt flow is targeted at Rs300 billion by the end of FY27. Imported RLNG costs will increasingly be passed on to consumers through domestic gas prices. Consumers are more likely to face smaller, more frequent increases in utility bills than a single large annual jump.
Some budget measures may receive less public attention but could still influence the economy over time. The government has committed to formally including the costs of public service obligations for the seven largest state-owned enterprises in the FY27 budget, rather than keeping many of these liabilities hidden in the system.
The Finance Act is also expected to implement the second phase of tariff reforms under the National Tariff Policy, gradually reducing import duties and special protections for selected sectors. Climate considerations are also being built into development spending. By August 2026, infrastructure projects under the public investment system are expected to carry at least a 30 per cent climate weighting in their evaluation criteria, giving greater priority to projects linked to resilience, water, energy efficiency and climate adaptation.
The MEFP is a commitment from the government to continue fiscal consolidation, raise tax revenues and resist providing debt-creating popular relief. In principle, this must be appreciated. However, the government must recognise that salaried workers, documented businesses and indirect taxpayers are overburdened by taxes. They will happily continue to bear this burden if they see taxable income in agriculture, real estate, retail, services and other undertaxed areas being brought into the net. If that does not happen, the fiscal deficit may narrow, but the trust deficit between citizens and the state will widen.
Essentially, the budget for the next fiscal year will determine if the government is serious about reducing this trust deficit.
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