Pakistan targets IMF goals in Rs17.57tr budget, eyes fiscal discipline

ISLAMABAD: The federal government on Tuesday unveiled Rs17.573 trillion budget for the fiscal year 2025-26, targeting a sharply lower fiscal deficit of 3.9 percent of GDP, or Rs5.037 trillion, as it seeks to strike a delicate balance between IMF-mandated fiscal discipline and economic relief.

The government aims to maintain momentum under the IMF’s Extended Fund Facility (EFF), offering modest public sector salary hikes, targeted tax relief for salaried classes and capital markets, while expanding levies to broaden the tax base and raise Rs1.16 trillion in additional revenues through the Federal Board of Revenue (FBR).

Finance Minister Muhammad Aurangzeb told the National Assembly while presenting the budget that it was being presented at a “historic moment” marked by national unity and resolve, referring to the recent Pakistan-India standoff.

“The spirit with which we protected our national sovereignty, we need to ensure our financial security the same way,” he maintained, continuing his address through a noisy session of the National Assembly.

“Pakistan has now achieved economic stability and is moving towards a Pakistan that is prosperous,” adding: “This budget marks the beginning of practical wisdom aimed at shaping a competitive economy, which will increase exports, reduce the fiscal deficit, save the country from imbalances in payments, and promote economic productivity. The budget’s practical wisdom is that we bring about fundamental changes in the DNA of our economy,” the finance minister told the National Assembly.

Interestingly, the FY26 budget outlay is 6.9 percent -- or Rs1.3 trillion—lower than the outgoing fiscal year’s Rs18.87 trillion, driven largely by a reduced deficit target and restrained expenditure growth. Still, it signals continuity in reform efforts, with real GDP growth projected at 4.2 percent, sectoral growth targets of 4.5 percent in agriculture, 4.3 percent in industry, and 4 percent in services. Inflation is forecast at 7.5 percent, while the current account deficit is estimated at $2.1 billion, or 0.5 percent of GDP.

To stay on track with the IMF’s targets, the government has set a primary surplus of Rs3.17 trillion, or 2.4 percent of GDP, marking the third consecutive year of surplus. The consolidated federal deficit is pegged at 5pc of GDP, down slightly from the revised 5.6pc for FY25. The overall countrywide fiscal deficit is expected at 3.9pc of GDP, contingent on provinces generating a surplus of Rs1.464 trillion -- a steep jump from Rs1 trillion this fiscal year. Encouragingly, the primary surplus target for FY26 is set at Rs3.17 trillion (2.4pc of GDP), marking the third consecutive year of primary surplus -- a key IMF benchmark.

Public debt servicing will consume Rs8.2 trillion -- 8 percent lower than last year due to falling interest rates. FBR tax collection has been targeted at Rs14.13 trillion, representing an 18.7 percent increase over revised FY25 estimates. Non-tax revenue is projected at Rs5.147 trillion, bolstered by Rs2.4 trillion in central bank profits and Rs1.468 trillion in Petroleum Development Levy. Privatization proceeds of Rs87 billion have been budgeted, largely expected from Pakistan International Airlines and select power distribution companies.

The government targets federal development budget (PSDP) at Rs1 trillion, while provincial development spending is set at Rs2.9 trillion -- bringing the total public sector development allocation to Rs4.2 trillion. The defence budget has been increased by 17.1 percent to Rs2.55 trillion, pensions are estimated at Rs1.05 trillion, and Rs1.2 trillion has been earmarked in subsidies for the power sector.

BISP allocation has been raised by 21 percent to Rs716 billion. Salaries for government employees will rise by 10 percent, and pensions will increase by 7 percent. The budget attempts to broaden the tax base by imposing 18 percent general sales tax on previously exempt solar panels and increased GST rate from 12.5 percent to standard 18 percent on small cars under 850cc. A carbon tax of Rs2.5 per litre on petrol, diesel, and furnace oil has been introduced, with a plan to double it to Rs5 per litre in FY27.

The government has also proposed increasing the local e-commerce sales tax from 1 percent to 2 percent for non-active taxpayers and raised the withholding tax on cash withdrawals from 0.6 percent to 0.8 percent for non-filers. Additionally, it has levied a 5 percent tax on pensions exceeding Rs10 million for retirees under 70 years of age. Despite new levies, the government offered relief to the salaried class by revising income tax slabs downward. For individuals earning between Rs600,000 and Rs1.2 million annually, the tax rate has been cut from 5 percent to 1 percent. Those earning between Rs1.2 million and Rs2.2 million will see their tax rate reduced from 15 percent to 11 percent with an additional Rs6,000, and those between Rs2.2 million and Rs3.2 million will pay 23 percent instead of 25 percent, with an additional Rs116,000, and Rs3.2 million to 4.1 million earners will pay 30 percent with additional Rs346,000 levy. The upper brackets have also been adjusted, with those earning above Rs4.1 million taxed at 35 percent with an additional levy of Rs616,000.

The government kept capital gains and dividend tax rates unchanged and reduced the super tax by 0.5 percentage points for corporates earning between Rs200 million and Rs500 million. It also announced the withdrawal of long-standing tax exemptions for industries in erstwhile FATA/PATA, although a one-year income tax exemption has been extended and a gradual imposition of sales tax—starting at 10 percent—will begin in FY26, rising to 16 percent by FY29.

To support industrial sectors, customs duties have been slashed across various categories. The duty on raw materials for steel has been reduced from 15 percent to 10 percent, made zero for textiles raw materials and industrial sewing machines, and trimmed to 5 percent for pharmaceutical ingredients. Similarly, import duties on CKDs and vehicle engines were cut from 20 percent and 10 percent to 15 percent and 5 percent respectively. Tax on machinery and special vehicles used in petroleum exploration has also been lowered from 15 percent to 10 percent. Aurangzeb said the agriculture sector would remain tax-free on fertiliser and pesticides, while warning of strict penalties for sales tax fraud and introducing automated checks to prevent income tax misuse. He also announced an overhaul of income tax rules, ending the filer–non-filer distinction and linking major transactions -- including vehicle sales and bank account openings -- to tax return filing.