Beyond the budget

Pakistan’s federal budget for FY25 must be seen not as an end, but a critical waypoint on a longer and more arduous journey towards a restructured, resilient and equitable economy. While the country has skirted the spectre of default that loomed large just two years ago – drawing unsettling parallels with Sri Lanka’s collapse in 2022 – it is now at an inflexion point. The challenge today is not merely stabilisation, which has largely been achieved, but steering decisively toward reform-led, inclusive and sustainable growth.

From stabilisation to structural reform: The last two years of fiscal discipline, painful as they have been, were necessary to restore macroeconomic order. But austerity cannot be a permanent strategy. What Pakistan needs now is a clear pivot from ad hoc crisis management to a credible, long-term vision for competitiveness, productivity and institutional renewal. Central to that vision is a departure from the country’s long-standing pattern of unsustainable growth spurts followed by damaging busts. This boom-bust trap has hollowed out industrial capacity, distorted investment incentives, and repeatedly undermined the credibility of economic policy. The FY25 budget represents a potential break in that cycle, but only if the intent behind its measures is followed through with coherent execution.

Export competitiveness, not import addiction: Among the more forward-looking reforms in the budget is the rationalisation of tariffs, particularly the reduction or elimination of additional customs and regulatory duties amounting to Rs200 billion. This is not merely a revenue sacrifice but a strategic investment in the country’s export ecosystem. For too long, high input costs, driven by protectionist tariffs, have stifled the growth of value-added exports.

This reform can help reverse deindustrialisation, incentivise manufacturing and enable SMEs to become part of global supply chains by lowering the cost of intermediary imports. This shift will not happen overnight, but it is a necessary precondition to unlock the productivity gains Pakistan desperately needs.

Recasting the federation: the National Fiscal Pact: A crucial but underappreciated milestone was the signing of the National Fiscal Pact (NFP) last year – a federal-provincial agreement to restructure expenditure responsibilities and taxation authorities. For the first time since the 18th Amendment, we see serious intent to translate constitutional devolution into functional decentralisation.

The reallocation of responsibilities – particularly in health, education and development – to the provinces has significant implications. While the federal budget may appear underwhelming in these sectors, a fuller picture emerges when provincial budgets are included. Yet even that aggregate is inadequate. With Pakistan’s Human Development Index (HDI) rankings among the lowest in South Asia, more is needed. Efficiency, transparency and performance-based funding, possibly through new mechanisms like the proposed Skill Impact Bond, must accompany higher spending.

Agricultural income tax: Perhaps the most quietly revolutionary development is the provinces’ agreement to enforce a meaningful agricultural income tax from September 2025. For decades, this sector – despite generating considerable wealth – has remained outside the tax net. The new legislation signals the end of tokenism. If implemented with integrity, this could be a landmark step toward equity in taxation. It’s important to recognise that this is not merely about revenue collection. Taxing agricultural income levels the playing field, enhances social cohesion and addresses a longstanding grievance among salaried and formal sector taxpayers.

Missed opportunities: Despite these gains, the budget missed the chance to decisively tackle some of the most regressive features of Pakistan’s revenue architecture. Real estate continues to operate as a massive store of untaxed wealth, while much of the retail and trading economy remains undocumented. Without action on these fronts, Pakistan’s tax base will remain narrow, unfair, and vulnerable to evasion. Any meaningful reform must begin with ending preferential treatment and plugging the loopholes that allow wealthier segments to remain outside the tax system. Simply raising taxes on already-taxed sectors, particularly formal industries like banking, only reinforces distortions and undermines incentives for formalisation.

A case for just and equitable taxation: In this regard, the treatment of the banking sector deserves particular scrutiny. While banks must contribute their fair share, they should not be viewed merely as convenient sources of revenue. The sector’s deep integration with the broader economy – especially in supporting SMEs, housing and financial inclusion – warrants a more strategic approach. Reforms in tariff policy demonstrate a willingness to think long-term; tax policy must now follow suit. Pakistan’s tax regime must evolve to become not just efficient and robust, but just and forward-looking – one that rewards compliance, broadens the net and reduces the burden on sectors already playing a disproportionate role.

Digitalisation and documentation: Widening the tax net and enhancing productivity also depend on aggressive digitalisation. E-invoicing, digital payments, POS tracking and unified data registries can dramatically improve compliance and reduce leakages. The aim must be to bring the informal into the formal – making it easier to participate in the documented economy than to remain outside it. For SMEs and exporters, digital integration also improves competitiveness by streamlining logistics, reducing transaction costs and facilitating trade finance. A digital economy is not just about convenience; it is the infrastructure of a modern state.

Human capital and climate resilience: Beyond fiscal and structural reforms, Pakistan’s long-term sustainability hinges on investing in people and protecting its environment. With nearly two-thirds of the population under 30, job creation must be an unrelenting priority. But these jobs must be rooted in skills, innovation, and opportunity – not short-term public works or political patronage.

Likewise, the mounting risks of climate change, from floods to smog, require urgent adaptation and resilience-building. These are not abstract development goals – they are existential issues.

The road forward: Budget FY25 does not offer all the answers, but it points in the right direction. The seeds of meaningful reform have been sown: in tariff liberalisation, provincial taxation and fiscal federalism. The next phase must focus on implementation, integrity and inclusiveness.

Pakistan’s economic revival is not a function of isolated budgetary decisions, but of a coordinated transformation in mindset, policy and institutional culture. The path ahead is difficult, but not invisible. What matters now is the collective will to stay the course.

Zafar Masud is the chairman of the Pakistan Banks Association. Farhan Bokhari is an Islamabad-based journalist who writes on political and economic affairs.