The Federal Budget 2026–2027, crafted under the close supervision of the International Monetary Fund, is primarily aimed at achieving fiscal stability. The government believes this strategy will eventually stimulate economic growth. To this end, the federal government has persuaded provincial governments to commit compulsory savings of Rs 1.8 trillion from their share in the divisible pool. The provinces have agreed to help by postponing their Annual Development Programmes.
Revenue and Spending Projections
The budget projects federal revenue of Rs 20.6 trillion and anticipates spending Rs 18.77 trillion in the next fiscal year. Debt servicing will consume the largest portion, with an allocation of over Rs 8 trillion, or 43% of total budget outlays. National defence will receive Rs 3 trillion, nearly 16% of the budget. This leaves only Rs 7.7 trillion for all other expenditures.
The Public Sector Development Programme (PSDP) is the worst affected, with its allocation shrinking from Rs 1.4 trillion in 2024–2025 to Rs 1 trillion in 2026–2027. This reflects a lopsided priority for sustainable development. The government utilised only half of the Rs 1.1 trillion PSDP allocation in the outgoing fiscal year, highlighting administrative inefficiencies and skewed management practices where politically motivated projects are prioritised over economically beneficial ones.
Impact on Provincial Shares
The 7th National Finance Commission (NFC) Award entitles provinces to 57.5% of the divisible pool of federal revenues. After the compulsory savings of Rs 1.8 trillion taken by the federal government, provinces will be left with about 46% of the pool. The federal government will control over 57% of the pool, in addition to the non-divisible pool of Rs 5.3 trillion and deficit financing projected at Rs 5.2 trillion.
Fears that the federal share of 43% undermines its ability to meet national obligations are unfounded. The federal government will collect Rs 20.6 trillion and spend Rs 18.7 trillion, giving it effective control over 90% of the national kitty. The generosity of the federating units for the national cause is notable.
Defence Spending and External Borrowing
Defence spending stands at 2.3% of GDP, in line with the global average, given Pakistan's external security challenges. The expenditure appears higher only as a percentage of budget outlays (16%). Recent regional conflicts underscore the necessity of strong national defence.
Pakistan has become the most frequent client of the IMF, now in its 24th assistance programme since 1958. The main reason for reliance on IMF bailouts is not a lack of resources but failure to attain fiscal stability through good governance. Multiple bailouts suggest that governments consider the IMF not as a lender of last resort but as an angel of mercy.
Debt and Revenue Generation
National debt of Rs 80 trillion constitutes 70% of GDP, normal for developing economies and below levels in Japan, France, or Canada. The main issue is the narrow revenue base. A one percentage point increase in the tax-to-GDP ratio could generate additional revenues of Rs 1.27 trillion, while plugging loopholes could save Rs 5–6 trillion annually.
The state of the economy recalls Dr Mahbub ul Haq's identification of the 'seven sins' of economic planners: fascination with growth indicators, ignoring ground realities, obsession with gaudy investments, excessive controls, growth without social justice, divorce between planning and implementation, and neglect of human development. These sins remain valid today.
Economic Challenges and Opportunities
Cost escalation from delayed development projects and skewed policies for short-term fiscal stability without building a strong industrial base or focusing on health, education, and research are principal causes of economic troubles.
Pakistan is the fifth-most-populous country, a declared nuclear power with the world's 14th-most-powerful military. Its firepower was validated in repelling aggression from India, and it mediated between the US and Iran. President Donald Trump credited Field Marshal Asim Munir with ending that conflict.
However, the economy ranks 40th globally, and the country ranks 168th on the Human Development Index. Key areas needing attention include raising the tax-to-GDP ratio from 10–11% to around 20%, helping the private sector build a strong industrial base, lifting the 45% of people living below the poverty line, and expanding public sector development. This requires political will and good governance.
