ISLAMABAD: Pakistan’s federal and provincial governments are set to significantly increase development spending in the upcoming fiscal year, with the total allocation estimated to exceed Rs 3,000 billion in FY25-26.
This marks a strong shift towards economic growth and infrastructure development, as key indicators point to an improved macroeconomic outlook.
The federal government is estimated to allocate nearly Rs 1,000 billion for development spending in FY26, which is higher than the estimated outlay for FY25.
Similarly, all four provinces of the country (Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan) are estimated to contribute approximately Rs 2,000 billion towards their own development budgets, indicating a substantial rise in public investment at both levels.
Under the current National Finance Commission (NFC) Award, the federal government is bound to continue the existing level of provincial allocations and has not made any cuts for FY26.
In fact, the federal government continues to spend on several areas that fall under provincial jurisdiction, like health, education, agriculture, and poverty alleviation.
Key macroeconomic indicators are also expected to show improvement. National savings and investment, measured as a percentage of GDP, are projected to increase in FY26.
Considering continued federal and provincial development spending combined with an increase in public and private sector investment, a lower interest rate environment, reduced energy prices, and continued macroeconomic stability, this is expected to support higher economic activity.
The International Monetary Fund (IMF) has forecasted Pakistan’s GDP growth to rise to 3.6% in FY26, up from 2.6% in FY25.
A significant drop in interest payments is also anticipated in FY26, after a sharp cut in the policy rate from 22% to 11%.
Estimates indicate that budgeted interest expenditure is expected to decline from Rs 9,800 billion in FY25 to Rs 8,685 billion in FY26.
This reduction in debt servicing costs has created room in the budget to accommodate higher defence spending without derailing fiscal discipline.
Further fiscal space is being created through government downsizing measures, including the closure of certain departments and the abolition of unfilled positions.
These expenditure savings, coupled with a projected increase in tax revenues from Rs 12,300 billion in FY25 to over Rs 14,000 billion in FY26, are expected to strengthen the federal fiscal position.
These developments will provide sufficient fiscal space for the government to meet the country’s defence needs without compromising the country’s growth trajectory.
Pakistan, IMF talks
Meanwhile, Pakistan and the IMF continued parleys for finalising the upcoming budget FY26.
According to the IMF announcement on Saturday, the Fund’s mission, led by Nathan Porter, has concluded its staff visit to Islamabad, which began on May 19.
The IMF staff visit focused on recent economic developments, programme implementation, and the budget strategy for fiscal year 2026.
At the end of the visit, Nathan Porter stated, “We held constructive discussions with the authorities on their FY2026 budget proposals and broader economic policy, and reform agenda supported by the 2024 Extended Fund Facility (EFF) and the 2025 Resilience and Sustainability Facility (RSF).
The Pakistani authorities reaffirmed their commitment to fiscal consolidation while safeguarding social and priority expenditures, aiming for a primary surplus of 1.6% of GDP in FY2026.
Discussions focused on actions to enhance revenue — including bolstering compliance and expanding the tax base — and prioritising expenditure. We will continue discussions towards agreeing on the authorities’ FY26 budget over the coming days.
Discussions also covered ongoing energy sector reforms aimed at improving financial viability and reducing the high-cost structure of Pakistan’s power sector as well as other structural reforms which will help foster sustainable growth and promote a more level-playing field for business and investment.
The authorities also emphasised their commitment to ensuring sound macroeconomic policy-making and building buffers.
The IMF team will remain engaged and continue its close dialogue with the authorities. The next mission associated with the next EFF and RSF reviews is expected in the second half of 2025, the statement concluded.
