As Pakistan nears the finalization of its federal budget for fiscal year 2025-26, analysts widely concur that the government is under significant pressure to fulfill its commitments to the International Monetary Fund (IMF). This involves demonstrating a clear trajectory towards fiscal consolidation and achieving a primary surplus. The budget, with a projected expenditure of Rs16.9 trillion, is being framed within a context of severe fiscal constraints and direct IMF oversight. Policymakers face the intricate task of balancing necessary reforms with limited public relief, all while endeavoring to maintain the confidence of external creditors.
The IMF’s two-tiered program structure, encompassing the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF), continues to be the primary driver of Pakistan’s fiscal strategy. Under these frameworks, the government is expected to prioritize fiscal discipline, broaden its tax base, and curtail untargeted subsidies. With the Federal Board of Revenue (FBR) assigned an ambitious target of Rs14.3 trillion, authorities are intensely focused on expanding the tax net, promoting documentation, and ensuring the maintenance of a primary surplus, aligning closely with IMF benchmarks.
Navigating a Fiscal Tightrope
Vaqar Ahmed, an independent economist, underscored the critical need for disciplined public finances. “We need a primary surplus, which means we will have to continue with robust revenue mobilization and discipline on the expenditure side. The government will have to maintain quite disciplined spending and there’s no room for wastages.”
He specifically advocated for the shelving of “look-good” projects, such as large-scale civil works, and urged the rationalization of untargeted subsidies. “Right now is not the time for ‘look-good’ projects, nor for large-scale announcements in the budget. Untargeted subsidies should be rationalised.”
The FBR’s ambitious revenue target of Rs14.3 trillion is viewed with skepticism by analysts. Sana Tawfik, Head of Research at Arif Habib Limited, stated, “The government’s target is around Rs14.3 trillion… so, we are expecting that there will be a shortfall, and the total FBR collection… will be around Rs13.9 trillion.”
On the expenditure front, lower interest rates are anticipated to offer some respite. “We will get some support from the lower interest rates on the markup payment side,” Tawfik noted. “We are expecting Rs8.5 trillion [in markup payments] next year. The government’s numbers being mentioned are around Rs8.7 trillion. So our expectation is slightly lower than the numbers being mentioned in the budget.”
This intricate balancing act between IMF-mandated austerity and the escalating costs of public services is emerging as the defining challenge for the FY26 budget. Any additional fiscal room is likely to be carved out only through stringent enforcement of expenditure discipline and the implementation of credible revenue-enhancing measures.
The Uphill Battle of Tax Expansion
Analysts predict an aggressive expansion of Pakistan’s tax net within the FY26 budget, acknowledging that the FBR is likely to fall short of its ambitious Rs14.3 trillion target. Tawfik reiterated, “We are expecting that there will be a shortfall, and the total FBR collection […] will be around Rs13.9 trillion.”
To bridge this anticipated gap, a series of new measures are under consideration. Tawfik detailed several proposals, including a 3% General Sales Tax (GST) on petroleum, projected to generate Rs147 billion, a 25% increase in Federal Excise Duty (FED) on tobacco products estimated to yield Rs100 billion, and a proposed pension tax expected to raise Rs55 billion.
Additionally, the removal of tax exemptions for FATA and PATA is projected to contribute Rs35 billion to revenue. Tawfik calculated, “If all are implemented, they total Rs869 billion,” adding that this would still leave a shortfall of approximately Rs439 billion against the Rs14.3 trillion target.
She also mentioned that a phased withdrawal of the super tax is under review. “One proposal suggests phasing it out gradually — 3% in the first year, another 3% the next, and 4% in the third — eliminating it by FY28. If implemented, it would benefit the overall economy, particularly companies.”
Supporting this perspective, Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company, advised, “The budget should focus on bringing new individuals and areas under taxation to increase revenue. Super tax on companies should also be phased out.”
Conversely, Ahfaz Mustafa, CEO of Ismail Iqbal Securities, cautioned that the revenue drive might disproportionately rely on regressive indirect taxation. “The budget will be a mixed bag with a lowering of direct taxation and a slight increase in indirect taxation,” he stated.
“I don’t see any out-and-out relief for taxpayers, because whatever relief they get on lower income tax will be compensated by higher indirect taxes like GST or PDL (Petroleum Development Levy).”
He further noted that the IMF has pushed for the removal of preferential tax regimes, such as those for FATA/PATA and SEZs (Special Economic Zones). “As per the IMF staff report, these subsidies have to end over time and whether the government takes action on it or not is going to be crucial.”
Amreen Soorani, Head of Research at Al Meezan Investment, also emphasized that taxation reform would be a cornerstone of IMF compliance. “A central focus will be the government’s new tax measures, the key to achieving the IMF-backed target of a nearly Rs2 trillion (16% YoY) revenue increase,” she said. “The budget’s stance on non-filers, specifically, the potential lack of provisions for them, will also be a significant factor.”
Collectively, these proposed measures underscore the government’s commitment to meeting IMF revenue benchmarks, albeit with increasing concern over the burden this will impose on compliant sectors and low-income households.
Uneven Sectoral Outcomes
As the government moves to align the forthcoming fiscal budget with IMF expectations, the proposed tax and regulatory changes are likely to result in varied outcomes across key economic sectors. Analysts have identified several industries poised to benefit, while others brace for challenges.
In the auto sector, reports suggest the government plans to extend the age limit for used car imports from three to five years. While this could benefit consumers by expanding access to more affordable options, it is widely expected to negatively impact the domestic industry.
“For autos, overall, the proposals seen so far appear negative,” said Tawfik. “For instance, in the IMF report, there was talk of increasing the age limit for imported used cars… if that happens, it would be negative for local auto assemblers.”
Construction-linked sectors are anticipated to gain from housing initiatives. Tawfik added, “There’s talk of announcing a low-cost housing scheme, with about 200,000 low-cost housing units proposed, along with talk of subsidised mortgage financing.”
“Both these are positive for the cement sector. And of course, since the cement sector is part of construction, this would also be positive for its allied sector, steel.” She further noted that removing tax exemptions for FATA/PATA “would be positive for the local steel industry.”
Technology firms may benefit from the continuation of reduced tax rates on exports. “Currently, there is a reduced withholding tax of around 0.25% on IT exports. That is set to expire in June 2026, by the end of the upcoming fiscal year. The proposal is to extend it — and if that happens, that would be quite positive for the overall tech sector,” she said.
The outlook for textiles is cautiously optimistic. Tawfik explained that a return to the fixed tax regime is being considered. “For textiles — the proposal is that after having been placed under the normal tax regime last year, they should now be brought back under FTR. So, if they return to FTR that would be positive for the textile sector.” However, she also cautioned that concurrent increases in sales tax could negate this benefit.
In the energy sector, the budget may introduce reforms aimed at addressing mounting circular debt, which would be credit-positive for the sector. Yet, these changes are likely to translate into increased costs for consumers. “Efforts should be made to somehow reduce the costs of the energy sector so that the burden on the consumer can gradually be eased,” said Ahmed.
Ahsan Mehanti, Managing Director of Arif Habib Commodities, highlighted the looming uncertainty for several segments. “There is uncertainty over [an] IMF-driven federal budget expected to be challenging for industrials, exporters, auto, oil and fertiliser sectors,” he stated.
“Sales tax increase on exporters, increase in PDL for the oil sector, FEDs revision on fertiliser sales, unfreeze of auto imports — all remain in play.” He also flagged pending decisions: “Government is yet to take key decisions upon IMF approval, mainly for the real estate package, PSDP and pensions that will impact growth numbers and budget outlay.”
Limited Relief, Targeted Welfare
Analysts anticipate that the budget will offer minimal broad-based relief for the general public, with any targeted welfare allocations heavily influenced by fiscal constraints and IMF oversight.
Dr. Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute (SDPI), identified the Benazir Income Support Programme (BISP) as the only major safety net expected to see an expansion in the coming year.
“One area where relief might be provided is the BISP — for which an allocation of about Rs700 to Rs725 billion has been proposed,” he said. He noted that this allocation would likely be linked to inflation, offering only limited cushioning for vulnerable households.
However, significant relief for the salaried middle class appears improbable, unless revenue outcomes improve substantially. “Whether relief can be provided to the salaried class or not will depend on how the final numbers turn out,” Dr. Suleri remarked, underscoring the tight fiscal envelope within which the government is operating.
Energy prices are also expected to continue their upward trend, which could exacerbate existing structural inefficiencies. “On one hand, as energy prices rise, people will increasingly move towards off-grid solutions,” Suleri explained.
“But if they stay on off-grid solutions, then capacity payment charges will continue to increase — so this issue will keep persisting,” he said, pointing to the long-term burden of circular debt that such trends aggravate.
In essence, with limited fiscal room and stringent IMF benchmarks, Budget FY26 is poised to prioritize economic stabilization over populist relief, extending constrained support only to the most vulnerable segments of society.
Green Goals Versus Fiscal Realities
The budget presents a complex web of internal contradictions and political sensitivities, particularly in its attempt to reconcile green energy ambitions with fiscal sustainability, and to expand taxation amidst resistance from established sectors.
Dr. Suleri drew attention to a fundamental contradiction within the IMF’s dual programming. “There is a bit of contradiction between the climate resilience fund and the Extended Facility programme — where, on one hand, we are talking about promoting renewable energy, and on the other hand… renewable energy will also cause capacity payment charges and circular debt to increase,” he explained.
This inherent tension is prompting the government to re-evaluate its solar incentives. “Any kind of incentive previously given to consumers on solar meters may no longer be provided.”
On the climate front, Suleri confirmed that a carbon tax, which was previously shelved in 2009–10 due to legal and political resistance, is being revived and applied to fuel. “In this budget, for the first time, a carbon levy or carbon tax is being introduced successfully,” he said, noting that earlier attempts had failed “due to opposition and a court judgment.”
The political economy of tax reform also remains precarious. Ahmed warned that the provincial lag in taxing services and agriculture, which collectively constitute over half of Pakistan’s GDP, continues to erode the national revenue base.
“The provinces need to work very hard. If you look, they have the entire services sector — but they are not generating tax from services in the manner they should… they should collect tax, at least from the large farmers,” he stated.
Meanwhile, public resistance to regressive taxation poses a real risk. Mustafa cautioned that the composition of the revenue effort would heavily skew towards indirect taxes. “Whatever relief [the public] gets on lower income tax will be compensated by higher indirect taxes like GST or PDL,” he said, describing the budget as a “mixed bag” tilted toward compliance with IMF benchmarks rather than distributive fairness.
Compliance First, Relief Later
Analysts assert that the upcoming fiscal document is primarily designed to satisfy IMF conditions, often at the expense of broader public relief or comprehensive structural reform.
“This year’s budget should help us keep the IMF programme on track,” said Ahmed, emphasizing that Pakistan’s stabilization goals would dictate both revenue and expenditure strategies. “The government will have to maintain quite disciplined spending — there’s no room for wastages,” he added.
Despite scattered sectoral incentives and climate-linked spending under the Resilience and Sustainability Facility (RSF), the dominant thrust of the budget remains fiscal consolidation under the Extended Fund Facility (EFF). “Whatever relief [the public] gets on lower income tax will be compensated by higher indirect taxes like GST or PDL,” said Mustafa, highlighting the regressive slant of the anticipated tax framework.
Only select sectors—particularly those aligned with climate objectives like cement and technology—are expected to derive benefits. “There’s talk of announcing a low-cost housing scheme, with about 200,000 low-cost housing units… both these are positive for the cement sector,” said Tawfik. She also noted that extending the 0.25% WHT (withholding tax) on IT exports would “be quite positive for the overall tech sector.”
Meanwhile, the Benazir Income Support Programme (BISP) remains the central pillar of the government’s public relief architecture. “That’s one area where relief might be provided and an allocation of about Rs700 to Rs725 billion has been proposed for the programme,” said Suleri.
The FY26 budget, therefore, represents not merely another economic blueprint, but a critical test of Pakistan’s capacity to sustain its stabilization efforts.
