Pakistan targets 4.2% economic growth in FY26 amid 7% spending Cut

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10 June, 2025 10:51

Pakistan targets 4.2% economic growth in FY26 amid 7% spending Cut

Pakistan economic growth in FY26

Federal Finance Minister Muhammad Aurangzeb, while delivering the budget speech, said that it is an honor for me to present the budget before the esteemed house. This is the second budget of the coalition government. I thank the leadership of the coalition parties, Nawaz Sharif, Bilawal Bhutto, Khalid Maqbool, Chaudhry Shujaat, Abdul Aleem, Khalid Magsi, for their guidance.

This budget is being presented on a historic occasion, when the nation has shown extraordinary courage and unity. The wisdom and bravery demonstrated by our political leadership, the armed forces of Pakistan, and the brave people of Pakistan in the face of Indian aggression will be written in golden words.

I congratulate the military and political leadership of Pakistan. Our forces made the defense impregnable with professional skills. This great success sent a message that the Pakistani nation is united in every trial. Now our focus is on achieving economic stability and development.

Our priority is to create an economy that delivers the fruits of development to every segment of society. This vision is what drives us towards a Pakistan where development reaches the doorstep of every individual. Last year, we took several important steps to improve the economy, which resulted in improved financial discipline and we achieved many successes.

Achieving a primary surplus equal to 2.4 percent of GDP, a significant reduction in inflation to 4.7 percent, it should be remembered that two years ago the inflation rate had reached 29.2 percent, a surplus current account is expected to be $1.5 billion compared to the deficit of $1.7 billion last year, the value of the rupee is stable, remittances increased by 31 percent in the 10 months of the current fiscal year to reach $31.2 billion.

We hope that by the end of the current fiscal year, the volume of remittances will reach 37 to 38 billion dollars. The State Bank’s foreign exchange reserves have increased by two billion dollars and will reach 14 billion dollars by the end of the current year. The government had to take tough decisions for economic improvement. The people also made many sacrifices, which yielded positive results.

Our most important economic problem was the persistent weakness of the revenue system. Pakistan’s tax-to-GDP ratio was 10.0 percent, which was insufficient to meet development expenditures and run the administrative affairs of the state. The FBR Transformation Plan was launched. The foundation of this plan is laid on People, Process and Technology.

Digital Transformation: For the first time in Pakistan, complete digital integration between the economy and the tax system has begun. Along with technology, steps are also being taken for human resources. Through data integration, 390,000 non-filers were identified, which made it possible to recover Rs. 300 million. Through fraud analyses, fake refund claims worth Rs. 9.8 billion were blocked. The number of fining and tax payers increased by 100 percent and revenue increased from Rs45 billion to Rs105 billion.

Many taxpayers try to evade taxes through lawsuits. Due to poor follow-up of these cases, government revenues remain subject to long delays. Due to the successful strategy of the current government, this year the FBR has collected revenues of Rs 78.4 billion through successful litigation. In addition, a case related to ADR was resolved through settlement in the courts, which earned the national treasury Rs 77 billion.

The copper and gold mines located in Reko Diq are an important asset for our future. The government is focused on making this asset useful. The feasibility study of this project was completed in January 2025. The expected mining period of this project is 37 years, during which the country will receive a cash flow of more than $75 billion.

Under this project, 41,500 jobs will be provided in construction work. The project is expected to generate $7 billion in taxes and $7.8 billion in royalties. This project will prove to be a game changer for Pakistan’s economy.

The following tariff reforms are being made part of the National Tariff Policy 2025-30.

The government is committed to creating a conducive business environment, encouraging investment and increasing exports. With a clear vision of economic growth, supporting businesses and promoting exports, the government is introducing a comprehensive ‘tariff reform package’ aimed at making the current tariffs appropriate, so that economic growth can be accelerated by increasing exports.

Additional customs duties will be abolished in four years, regulatory duties will be abolished in five years, the Fifth Schedule of the Customs Act 1969 will be abolished in five years, a total of four customs duty slabs (0 percent, 5 percent, 10 percent and 15 percent) and the maximum customs duty limit will be 15 percent.

The government is pursuing a modern and dynamic privatization strategy to improve public sector performance, reduce fiscal burden, and promote investment. In 2025-26, we aim to complete key transactions like PI and Roosevelt Hotel. We will accelerate policy and regulatory reforms for the privatization of key assets like discos and jumbos.

Finance Minister Muhammad Aurangzeb said that changes in the pension scheme through executive orders in the last few decades have increased the burden on the government treasury, which the government has introduced important reforms to reduce. Under the new reforms, early retirement will be discouraged and pension increases have been linked to the Consumer Price Index.

The period of family pension after the death of a spouse has been limited to 10 years and in addition, multiple pensions have been abolished. The Finance Minister further said that in case of re-employment after retirement, the employee will have to choose between pension or salary.

Climate change is a threat to Pakistan, it is a matter of our survival. Pakistan is among the countries most affected by climate change. Addressing the negative effects of climate change is one of the government’s top priorities. Dealing with climate change requires a lot of resources, which is why the government has paid special attention to climate finance in the last sixteen months. The World Bank and IFC, under their Country Partnership Framework, will provide Pakistan with $40 billion in resources over the next ten years. Tackling climate change is a key priority of this framework, and after a year of tireless work, the IMF has provided a $1.4 billion Resilience and Sustainability Facility for Pakistan.

The government plans to expand BISP, proposing to allocate 716 billion for BISP, an increase of 21 percent, the sponsorship program will be expanded to 10 million families. The educational scholarship program is being expanded to 12 million children.

Our government is committed to protecting the most vulnerable segments of society through a comprehensive and effective social protection system. During the ongoing fiscal year 2024-25, the Benazir Income Support Program played a significant role in protecting low-income families from economic hardship. A large amount of unconditional cash assistance was provided to 9.9 million eligible families from an allocated fund of Rs. 592 billion.

Pakistan’s ICT exports recorded an impressive increase during the current fiscal year. In the first 10 months of the year, these exports reached $3.1 billion, which is 21.2 percent more than the previous year. This significant increase was the result of government policy. The journey of growth in this sector will continue in the next fiscal year as well. There is a plan to increase ICT exports to $25 billion in the next five years.

Electricity for the industrial sector will be 31 percent cheaper and electricity for 18 million beneficiaries will be 50 percent cheaper. The essentials and 50 percent of the work of privatization of the distribution companies of Faisalabad, Gujranwala, and Islamabad have been completed. NTDC has been reorganized and divided into 3 new companies.

The planning and implementation of future projects is the responsibility of these companies. World-class qualified personnel will be appointed. Rules and regulations for the electricity sector and free market are finalized, and implementation will begin in the next 3 months.

The inclusion of expensive power plants of 9,000 megawatts in the national grid has been abandoned for the sake of cheap electricity, all state-owned power plants in the form of gencos have been closed, and an annual burden of 7 billion on the treasury has been eliminated.

The new budget has decided to provide relief for the salaried class. All tax slabs have been reduced for the salaried class. The tax rate on salaries between Rs. 6 and 1.2 million will be 1 percent. The tax amount on incomes of Rs. 1.2 million has been proposed to be reduced from Rs. 30,000 to Rs. 6,000. It has been proposed to reduce the tax rate on salaries up to Rs. 2.2 million from 15 percent to 11 percent. The tax rate on salaries between Rs. 2.2 million and 3.2 million has been reduced from 25 percent to 23 percent.

A simple and user-friendly return form will be introduced for salaried individuals and small business owners. Only 7 basic pieces of information will be required. No lawyer or expert will be required to fill out the user-friendly return form.

The budget is the beginning of a strategy designed for a competitive economy. We will change the DNA of the economy by bringing fundamental changes. The economic growth rate for the fiscal year 2025-26 is expected to be 4.2 percent, the inflation rate will be 7.5 percent, the budget deficit will be 3.9 percent of GDP, and the primary surplus will be 2.4 percent of GDP.

The Finance Minister said that 3 billion has been allocated for the construction of schools affected by the floods, while 4.3 billion has been allocated under the Prime Minister’s Youth Skill Development Program, and 161,500 youth will be educated.

In the field of higher education, Rs39.5 billion has been allocated for 170 HEC projects, Rs38.5 billion is for ongoing HEC projects, Rs4.8 billion has been allocated for 31 schemes in the budget for science and technology, and Rs9.8 billion has been allocated for the construction of Danish schools.

Rs 1928 billion is being allocated in the form of grants, which is for the Benazir Income Support Program, the newly merged districts of Azad Jammu and Kashmir, Gilgit-Baltistan and Khyber Pakhtunkhwa, etc. It is proposed to allocate Rs 140 billion for Azad Jammu and Kashmir, Rs 80 billion for Gilgit-Baltistan, Rs 80 billion for the merged districts of KPK and Rs 18 billion for Balochistan from the current expenditure.

A budget of Rs 1,000 billion has been allocated for PSDP, in the federal development budget, it is proposed to allocate Rs 328 billion for transport infrastructure projects, Rs 100 billion has been allocated for the Karachi-Chaman N-25 highway to be dual-lane, and Rs 15 billion has been allocated for the construction of the Sukkur-Hyderabad 6-lane motorway.

Rs 7 billion has been allocated for the timely completion of the Thar Coal Rail Project, while Rs 1.9 billion has been allocated for the upgradation of Gadani Shipbreaking facilities.\

In the federal budget 2025-26, it has been decided to impose 18 percent sales tax on small vehicles up to 850 cc. According to Federal Finance Minister Muhammad Aurangzeb, the aim of this move is to bring uniformity in sales tax on petrol, diesel and hybrid vehicles.

The budget also announced strict measures against unregistered businesses. The bank accounts of unregistered businesses will be frozen and the transfer of their property will be banned, while in case of serious crimes, the business premises can be sealed and the goods can be confiscated.

However, the concerned party will have the right to appeal within 30 days.

The federal government has presented an important proposal to promote solar panels manufactured in Pakistan in the budget for the fiscal year 2025-26, under which it has been decided to impose an 18% sales tax on imported solar panels.

Earlier, the federal cabinet approved the budget proposals for the fiscal year 2025-26 on Tuesday.

During a recent meeting led by Prime Minister Shehbaz Sharif, the economic team reached a consensus on a 6% salary hike for government employees.

This proposed increase, which emerged from initial discussions considering a 6% to 10% raise, now heads to the cabinet for its ultimate approval. It’s also anticipated that the government might consult with the Pakistan Peoples Party (PPP) regarding these budget proposals.

The National Assembly is set to convene today at 5 PM under the chairmanship of Speaker Sardar Ayaz Sadiq, where Finance Minister Muhammad Aurangzeb will present the federal budget of Rs 17,600 billion for the fiscal year 2025–26.

According to official sources, non-development expenditures will amount to Rs 16,286 billion, while the budget deficit is projected to be 5 percent of GDP, equating to Rs 6,501 billion. To address this, the government aims to collect Rs 14,131 billion in tax revenue and Rs 5,167 billion through non-tax revenue.

The total non-tax revenue target for the upcoming fiscal year has been set at Rs 19,298 billion. A significant policy shift includes a proposal to eliminate tax exemptions across all sectors. Additionally, the introduction of a 2.5 percent carbon levy is being considered as part of broader revenue-generation efforts.

Debt servicing remains a major expenditure, with Rs 8,207 billion proposed for interest payments. Defense allocations are expected to total Rs 2,550 billion. To boost petroleum-related revenue, the government has proposed increasing the petroleum levy from Rs 78 to Rs 100 per liter, with a goal of generating Rs 1,300 billion.

The federal development budget has been set at Rs 1,000 billion, including Rs 120 billion earmarked for the construction of the N-5 highway. Development funding for state-owned enterprises is projected at Rs 355 billion.

Provincial transfers will total Rs 8,206 billion, while provinces are expected to allocate Rs 3,300 billion for development projects. The budget also includes several measures aimed at providing relief to public sector employees. These include a proposed 10 percent salary increase for government employees and a 2.5 percent tax reduction across all salary slabs. Employees in grades 1 to 16 are expected to receive a 30 percent disparity allowance.

Pensioners may also see a 10 percent increase in their pensions, with Rs 1,055 billion allocated for this purpose. Meanwhile, subsidies amounting to Rs 1,186 billion are planned.

New tax measures are likely to impact digital earners, with proposals to bring YouTubers, freelancers, and non-filers under the tax net. The general sales tax (GST) on non-filers is expected to rise from 18 percent to 20 percent.

In a move to promote digital transactions, there will be no additional charges for purchasing petroleum products through digital payment methods. However, an additional Rs 2 per liter will be charged for fuel bought using cash.

Furthermore, the tax rate on cash withdrawals exceeding Rs 50,000 by non-filers is expected to double—from 0.6 percent to 1.2 percent. The budget also proposes Rs 971 billion for civil government expenditures during the next fiscal year.