A blueprint for self-reliance

In response to recent discussions between the government of Pakistan and the International Monetary Fund (IMF), the budget for FY2025–26 is being positioned as a pivotal initiative to steer the economy towards self-sufficiency and resilience.

High-level engagements conducted in Islamabad, as well as virtually, have focused on the introduction of ‘bold measures’ by Finance Minister Muhammad Aurangzeb to address the enduring structural weaknesses in Pakistan’s economic framework. The objective is to transition from reliance on external loans and donor support to a fiscally responsible, domestically driven growth model.

The finance minister has underscored the necessity to advance beyond the conventional accounting approach to budgeting, which has primarily concentrated on balancing fiscal accounts rather than transforming the overarching economic landscape. He articulated the concept of generating economic ‘Alpha’, a term borrowed from finance that signifies returns exceeding average market performance through a comprehensive overhaul of debt management structures, emphasising encouraging investment and promoting innovation-driven growth.

According to the minister, this year’s budget intends to delineate projected expenditures and revenues and fundamentally alter Pakistan’s economic framework.

A central focus area is fiscal consolidation. With the IMF advocating for realistic revenue targets and stringent expenditure discipline, Pakistan confronts the challenge of implementing policies ensuring budget credibility while fostering economic growth. Current estimates indicate that the tax-to-GDP ratio in Pakistan is approximately 10.6 per cent, one of the lowest in the region. In contrast, emerging economies typically maintain ratios between 18 and 22 per cent. To bridge this gap, authorities must undertake an assertive tax broadening strategy.

The IMF has expressed concerns regarding specific governmental proposals, particularly those pertaining to increased defence spending and tax concessions for employed individuals and the real-estate sector. The government of Pakistan is advocating for an 18 per cent augmentation of the defence budget, which would amount to approximately Rs2.5 trillion. While national security is undeniably paramount, this budgetary allocation also aligns with Pakistan’s fundamental national interest of maintaining a strategic balance in the region, especially considering the prevailing security challenges and escalating tensions within South Asia.

Establishing a credible defence posture is essential for preserving national sovereignty and ensuring political stability, both of which are prerequisites for fostering economic growth. Nevertheless, critics contend that such expenditures should be judiciously weighed against the pressing needs within the public service sectors, including health, education and social protection domains that are equally vital for enhancing national strength and resilience. Achieving a balance between hard and soft dimensions of national security is crucial for attaining sustained self-reliance and developing a more inclusive economic model.

In this context, a pivotal reform lies in expanding the tax base. Currently, a substantial portion of economic activity, particularly within sectors such as retail, agriculture and real estate, functions informally or entirely outside the taxation framework. The Overseas Investors Chamber of Commerce and Industry (OICCI) has advocated for the equitable taxation of all income, irrespective of its source, which includes the incorporation of landlords, significant agricultural landholders and commercial real-estate developers into the tax net.

To realise this objective, the government must prioritise the modernisation of the Federal Board of Revenue (FBR). The digitalisation of the FBR, encompassing initiatives such as real-time data sharing from financial institutions, property registries and the National Database and Registration Authority (NADRA), can significantly enhance tax compliance and expand the tax base. The proposed implementation of artificial intelligence-driven audits and cross-data verification tools represents a significant advancement in this regard.

Equally important is the simplification of tax procedures. As an indication of reform, the government has pledged to streamline tax return processes for salaried individuals. This measure will not only promote compliance but also foster public trust in the tax system. Facilitating a more straightforward tax filing experience may incentivize voluntary compliance, which is essential in an environment characterized by low public trust.

Concurrently, the budget is anticipated to bolster the real estate sector, one of Pakistan’s largest and most influential industries. Among the proposed reforms is the exemption of advance tax for overseas Pakistanis possessing National Identity Cards for Overseas Pakistanis (NICOP) or Pakistan Origin Cards (POC), alleviating acquisition costs and promoting investment from the diaspora. However, these incentives must be carefully balanced with valuation reforms and regulatory measures targeting non-documented transactions to mitigate speculative market fluctuations and price distortions.

In addressing sectoral priorities, the federal budget must tackle Pakistan’s chronic persistent trade imbalance. The nation's imports consistently exceed exports, exerting pressure on the balance of payments. A pronounced emphasis on export promotion is essential to develop a self-sustaining economy. Consequently, budget allocations should incentivise value-added exports within key sectors such as textiles, information technology services, and agro-based industries. This strategy may encompass subsidies for energy inputs directed to export industries, tax incentives for exporters and investments in vital export infrastructure, including logistics and warehousing.

Another critical focus area is the revitalisation of agriculture. With more than 38 per cent of Pakistan’s labour force engaged in this sector, which contributes approximately 19 per cent to the GDP, a significant productivity gap exists due to prolonged neglect, water mismanagement and insufficient mechanisation. A strategic budget should include provisions for agricultural extension services, drought-resistant crop varieties, improved irrigation infrastructure and enhanced credit access for smallholder farmers.

Industrial policy also necessitates comprehensive reform. The underdevelopment of Pakistan's manufacturing sector can be attributed to high energy costs, outdated technology, and regulatory challenges. The budget should introduce productivity-linked incentives, lower import duties on industrial machinery, and finance vocational training programmes aimed at enhancing workforce skills. Developing domestic industries that reduce import dependency and generate value-added products is crucial for ensuring Pakistan's future economic sovereignty.

To alleviate poverty and stimulate grassroots economic activity, social safety nets such as the Benazir Income Support Programme (BISP) and the Ehsaas initiative must be both expanded and better targeted. Any reductions to these programs under IMF pressure would prove socially and politically untenable. Therefore, reform measures should redirect subsidies away from affluent sectors towards the impoverished and vulnerable populations.

Another essential area for reform is the privatisation of loss-making state-owned enterprises (SOEs). Currently, 24 SOEs have been transferred to the Privatisation Commission. The government must ensure that the privatisation process is transparent and yields economic benefits through improved services, job creation, and investment attraction. Furthermore, promoting public-private partnerships (PPPs) in infrastructure, healthcare and education can mobilise private capital without exacerbating the fiscal deficit.

Access to affordable credit is imperative for bolstering entrepreneurship and supporting small businesses. The backbone of job creation is access to affordable credit. The budget should strengthen credit guarantee schemes, enhance support for microfinance institutions, and incentivise commercial banks to lend to small and medium-sized enterprises (SMEs) through risk-sharing frameworks.

Energy security constitutes another fundamental pillar of a self-sustaining economy. Pakistan's high reliance on imported oil and gas renders it vulnerable to external economic shocks. Budgetary resources should be allocated to renewable energy projects, including solar and wind initiatives, which can provide long-term cost stability and mitigate the current account deficit. Regional energy trade should also be pursued through investments in grid infrastructure and cross-border energy agreements.

Lastly, investment in education and human capital development must not be neglected. Although Pakistan boasts a young labour force, it often lacks adequate skills. Budget allocations should prioritise STEM education, vocational training, and digital literacy to leverage demographic advantages fully. Initiatives that connect academia with industry, foster research and innovation, and promote entrepreneurship among youth should be at the forefront of these efforts.

Budget 2025–26 offers a significant opportunity for Pakistan to alter its economic trajectory. With ongoing engagement from the IMF and uncertain global economic conditions, policymakers must urgently act to implement structural reforms. The path toward a self-reliant, inclusive, and sustainable economy is fraught with challenges; however, with the appropriate mix of policy interventions ranging from broadening the tax base and supporting businesses to investing in human capital and social protection the vision of economic sovereignty can be realised.

The ultimate measure of success will depend not on promises or rhetoric, but on the effective execution of policies that yield tangible results for the populace of Pakistan.

The writer is a trade facilitation expert, working with the federal government of Pakistan.