By Staff Reporter
There is a ritual quality to Pakistan’s annual budget exercise that has grown almost theatrical in its predictability. The finance minister rises. Revenue targets are announced with conviction. Tax-base broadening is pledged. The IMF nods approvingly from Washington. The press covers it for two days. Then the lobbyists who were in Islamabad the week before the budget speech collect their exemptions, the salaried class discovers its withholding has increased, and the country proceeds to do exactly what it did the year before — borrow to survive, reform to perform, and grow barely enough to matter.
The budget for fiscal year 2026–27, due June 10, will not break this cycle. There is almost no chance it will be designed to. The more unsettling question is whether anyone in a position of authority has yet fully confronted the scale of what that failure now costs.
The Arithmetic of Stagnation
Start with the numbers, because they are more damning than any political commentary. Pakistan’s average real GDP per capita growth in the current cycle has fallen to its lowest level since the 1960s — lower, in per-capita terms, than any decade since the country’s breakup in 1971. Growth between 2020 and 2024 averaged just 0.4 percent annually. The preliminary estimate for FY2025–26 puts real GDP growth at roughly 3.7 percent, which sounds acceptable until one notes that population expansion absorbs most of it, leaving per-capita income effectively stagnant. Real per capita incomes remain below levels reached more than a decade ago.
Inflation climbed back into double digits at 11.7 percent in May 2026. Merchandise exports fell more than 5.6 percent to $27.9 billion in the first eleven months of the current fiscal year. The trade deficit widened roughly 17.5 percent to round $34.76 billion. Total annualised exports of goods and services stand at approximately $36 billion — a figure that makes a mockery of the government’s repeatedly advertised ambition of $100 billion in exports by 2030. The gap between aspiration and reality is not a rounding error. It is a measure of how seriously the political system takes its own promises.
The fiscal structure is not merely constrained; it is becoming structurally incoherent. In a federal budget of Rs17.57 trillion, nearly Rs8.2 trillion — close to 47 percent — goes to debt servicing alone. Defence spending exceeds Rs2.5 trillion. Pensions have crossed Rs1 trillion. Current expenditure stands above Rs16 trillion, while the entire federal development programme amounts to roughly Rs1 trillion. Pakistan is no longer financing development. It is financing the accumulated cost of past failures, and borrowing more each year to keep the architecture standing. This is not economic recovery. It is stagnation dressed up as stabilisation.
The Fatigue Nobody Admits
The government’s preferred narrative is that three years of painful adjustment have produced results: reserves have recovered, the current account deficit has narrowed, inflation — after its catastrophic peak — has moderated, and the IMF programme has remained broadly on track. These achievements are real, and dismissing them entirely would be unfair. Macroeconomic collapse was a genuine possibility in 2022–23, and it was avoided.
But stabilisation was always supposed to be a means, not an end. The uncomfortable question — raised with increasing force by economists, business leaders, and the authors of the recently published Shadow Economic Survey — is: stabilisation for what, exactly?
A sense of what might be called stabilisation fatigue has settled into Pakistani economic life. Industries continue operating below capacity. Private investment has not recovered. Consumers, battered by years of eroded purchasing power, have not returned. For most Pakistanis, the lived experience of the economy bears almost no resemblance to the official narrative of recovery. The IMF-mandated toolkit — tight monetary policy, fiscal contraction, demand compression, import controls, energy price hikes — has restored certain balances while compressing others. The social and economic costs of prolonged adjustment are now more visible than any of its benefits.
Some analysts believe GDP growth in FY27 could remain closer to 3 to 3.5 percent if crude oil prices stay elevated amid continued Middle East tensions — well below even the government’s target of 4.1 percent. The average growth over the last three years has remained below 2 percent.
Whether or not one accepts that framing entirely, the underlying point stands. Pakistan Banks Association Chairman Zafar Masud put it with unusual candour: “The IMF programme buys stability, not growth. Stability is necessary, but growth is what ultimately reduces poverty and improves living standards.” The distinction matters enormously in a country where nearly 2.5 to 3 million young people enter the labour market every year, and where the economy needs to generate roughly 25 to 30 million jobs over the next decade simply to prevent rising unemployment, outward migration, and social stress. As World Bank President Ajay Banga warned during his recent visit, this is a generational challenge; failing to align growth with employment risks converting Pakistan’s youth bulge into instability rather than a dividend.
The Architecture of Extraction
Pakistan’s fiscal crisis is frequently described as a revenue problem. It is that, but the characterisation is incomplete and somewhat misleading, because it implies the solution is higher tax collection from existing sources. The more fundamental problem is structural: the state’s revenue machinery was never designed to be fair, efficient, or broadly based. It was designed to be navigable — by those with the resources to navigate it.
Consider the dimensions of the dysfunction. The Federal Board of Revenue collected approximately Rs11.7 trillion in FY2024–25, a 26 percent increase that pushed Pakistan’s tax-to-GDP ratio to a historic high of 10.3 percent. These numbers were celebrated. The celebration was premature. India sits at 18 percent; the OECD average is 34 percent. Pakistan is not closing the gap. The FBR also missed its own revised target by Rs156 billion and fell short of the original by over a trillion rupees. Meanwhile, running three tiers of collection — federal, provincial, and district — costs an estimated Rs150 to 200 billion annually in direct administrative expense, and governance researchers estimate that informal payments inside the tax system drain a further Rs200 to 400 billion each year. That is money that does not build roads or fund hospitals. It finances the system’s own corruption.
There are more than seventy withholding provisions inside the Income Tax Ordinance alone. Four provincial regimes operate with conflicting definitions. District-level schedules are sometimes not publicly available at all. This complexity is not, as it is sometimes characterised, the unfortunate consequence of poor drafting over many decades. It is load-bearing. The labyrinth holds up the structure of exemptions that powerful interests have built for themselves and continue defending with considerable sophistication before every budget cycle.
The incidence of this system falls in precisely inverted proportion to the ability to bear it. The FBR collected Rs605.6 billion in income tax from the salaried class in FY2024–25, up from Rs391.4 billion the year before. Salaried employees — who cannot hide income, cannot negotiate assessments, and cannot simply remain undocumented — are being squeezed ever harder to compensate for the state’s inability to reach those who can. Retail trade remains undertaxed. Agricultural income taxation is largely symbolic. Real estate continues functioning as a preferred vehicle for parking untaxed wealth. Banks increasingly prefer financing the sovereign through risk-free government securities rather than lending to productive industry. Manufacturers absorb some of the highest industrial energy tariffs in Asia. Exporters finance the state through delayed refunds while competing against regional rivals with cheaper inputs, more coherent industrial policy, and better logistics.
“Pakistan’s recurring balance-of-payments crises are downstream symptoms of unresolved structural fiscal distortions — distortions that have been patched in the past rather than fixed,” Masud observed. Every budget claims to broaden the tax base. Every year, the same pattern repeats: organised lobbies negotiate protections before the finance bill is unveiled, politically connected sectors preserve exemptions, and the burden falls again on those least able to fight back. This is not accidental dysfunction. It is the operating model of the Pakistani state.
Development That Isn’t
Equally critical, and perhaps even less discussed in polite budget commentary, is where the money that is collected actually goes. Current expenditure absorbs more than 92 percent of federal spending. Even within the development budget, politically attractive infrastructure dominates allocations — highways, flyovers, prestige corridors, and high-visibility schemes — while the less visible foundations of long-term productivity are systematically starved: metropolitan transport, water systems, logistics networks, municipal governance, vocational training, industrial technology upgrading, and worker housing near manufacturing clusters.
This misallocation reflects Pakistan’s deeper political economy with uncomfortable clarity. Large infrastructure schemes generate procurement contracts, land speculation, political branding, and patronage opportunities. They centralise discretion, reward connected construction and real estate lobbies, and produce ribbon-cutting ceremonies. Institutional reform, by contrast, threatens entrenched interests while producing no visible event that a minister can stand in front of for a photograph. The incentive structure is almost perfectly calibrated to produce the wrong choices.
Pakistan does not suffer from a shortage of concrete. It suffers from a shortage of economically functional cities. The country is already overwhelmingly urban in economic function, even if official definitions — placing urbanisation near 39 percent — obscure this reality. Broader measures based on density, connectivity, and labour-market integration suggest a far more urbanised society. Pakistan’s cities generate the overwhelming majority of its industrial output, services activity, tax revenue, and export potential. Yet governance remains trapped in a rural-patronage imagination inherited from an earlier century, and metropolitan governance is fragmented across overlapping authorities designed more to preserve political control than to enable efficient urban management.
The consequences compound each other. Agricultural land is consumed by speculative housing schemes rather than productive industrial clusters. Informal settlements expand without services. Public transport is inadequate. Housing near employment centres is scarce. Female labour-force participation remains constrained by unsafe mobility and inadequate urban infrastructure. And Pakistan’s cities — the engines of whatever growth the economy can generate — are being allowed to slowly choke.
The Energy Trap and the Export Illusion
Nowhere is the structural incoherence of Pakistan’s economic model more visible than in its treatment of the export sector. Pakistan continues to speak the language of export-led growth while maintaining what is, in practice, an anti-export economic structure. High tariffs protect inefficient domestic producers while raising costs for downstream exporters. Exchange-rate instability destroys investment planning horizons. Refund delays trap working capital. Energy pricing converts governance failures — the circular debt, the capacity payments, the transmission losses, the distribution company inefficiencies — into direct penalties on the competitive industry.
Textiles still dominate the export base but face mounting pressure from regional competitors with cheaper energy, more coherent industrial policies, better logistics ecosystems, and increasingly, the productivity advantages that artificial intelligence is beginning to deliver to better-capitalised manufacturing rivals. Services exports, particularly in information technology, have shown genuine momentum but remain far below potential, hampered by weak fixed-broadband infrastructure — penetration sits at around 2 percent — financing constraints, skills gaps, and regulatory friction. High-potential sectors, including pharmaceuticals, engineering goods, and food processing, remain constrained by bottlenecks that successive governments have acknowledged and done little to resolve.
The energy sector deserves particular attention, because circular debt has long since ceased being a power-sector problem and evolved into a mechanism of macroeconomic strangulation. Capacity payments, transmission losses, theft, governance failures, and chronically delayed reforms are repeatedly socialised through higher tariffs imposed on paying consumers and export-oriented manufacturers. No serious export economy can sustain globally uncompetitive energy pricing while expecting manufacturing competitiveness to follow. The budget must include a credible, time-bound restructuring plan — renegotiating expensive contracts where legally feasible, accelerating grid modernisation, targeting subsidy rationalisation at low-income households rather than blanket inefficiency subsidies — or the export ambition remains a slogan.
Reform on Paper, Suffocation in Practice
There is another constraint that deserves more honest attention than it typically receives in the budget debate: the bureaucracy itself. Pakistan’s growth problem is not only fiscal. It is deeply administrative. The state does not merely tax production — it actively interferes with it through layers of discretionary authority, procedural friction, and regulatory uncertainty that function as a hidden tax on enterprise at every stage.
In practice, the bureaucracy operates through extensive discretionary powers across licensing, tax enforcement, procurement approvals, land conversion, environmental clearances, customs classification, and regulatory interpretation. These powers create delay, uncertainty, and negotiated outcomes rather than predictable rules. The structure is not merely inefficient; it is systematically anti-entrepreneurial. It privileges incumbents who can navigate or influence administrative processes while raising barriers for new entrants, small and medium enterprises, and formal-sector expansion. Even well-designed reforms are blunted at the implementation stage. Export incentives are diluted. Tax reforms are distorted. Industrial policy becomes inconsistent because execution depends on fragmented bureaucratic judgement rather than transparent and enforceable rules.
For Pakistan to move from stabilisation to transformation, this administrative structure must be fundamentally redesigned: from discretion to rules, from permissions to declarations, from case-by-case approvals to automated, digital, and time-bound processes. Without dismantling administrative discretion, Pakistan will continue reforming its economy on paper while suffocating it in practice.
A Budget Test, Not Just a Fiscal Document
The coming budget will be shaped almost entirely by its revenue effort. The IMF has upgraded Pakistan’s revenue target to a binding quantitative performance criterion rather than a soft benchmark — a direct consequence of repeated collection shortfalls. A fourth consecutive primary surplus will be pursued. Fiscal restraint will be maintained. The pressure on the salaried class and documented businesses will, in all probability, increase again while the informal economy watches from a comfortable distance.
There will almost certainly be some relief gestures — modest adjustments for salaried taxpayers, perhaps some headline-rate trimming for visible political effect. Wadho’s assessment of this is worth noting: whatever is given with one hand will likely be retrieved with the other through higher petroleum levies or additional indirect taxation. The structural pressure does not relent; it merely changes its instruments.
Pakistan’s remittance inflows remain a genuine stabiliser — roughly $33.8 to 34 billion in the first ten months of FY2026, an impressive figure. But this resilience has limits. Geopolitical tensions in the Gulf, particularly the Iran-related escalation and its effect on energy prices, shipping risk, and labour market uncertainty in key corridors, represent a non-trivial downside risk. The external stability that remittances have helped purchase is more fragile than its current numbers suggest.
Masud’s framing of the FY27 budget as “an opportunity to break Pakistan’s recurring low-growth, high-debt equilibrium” is correct. Whether it will be seized is a different question. The structural obstacles to that break are not technical. They are political. The interests that benefit from the current architecture — exemptions, speculation, patronage, protected monopolies, untaxed agricultural income, real estate as a wealth-parking vehicle — are deeply embedded in the political coalitions that form every government, and they attend every pre-budget negotiation with greater sophistication and consistency than any reform advocate.
The choice analysts identified is clear enough: “reform, delay or another lost cycle.” Pakistan’s budget-making process has become captive to precisely those interests most resistant to the changes that transformation requires. Every year, the same ritual. Every year, the same structural outcome beneath the new numbers.
What would a genuinely different budget look like? It would impose a strict productivity filter on all major public spending. It would launch a serious national urban productivity strategy rather than another highway programme. It would restructure or privatise loss-making state-owned enterprises on a published timeline rather than continuing to subsidise their deficits. It would introduce a stable, multi-year export competitiveness framework rather than annually changing schemes that destroy planning certainty. It would move real estate valuation toward market rates, strengthen vacant land taxation, and redirect national savings toward productive investment. It would take the provinces’ underperformance on agricultural taxation and urban property taxation seriously, rather than allowing the federation to bear the political cost of aggressive revenue extraction while provinces preserve local patronage arrangements.
It would, in short, require a governing coalition willing to damage its own immediate interests in exchange for a country that can actually grow. That is a high bar. It has not been met in decades.
The budget is therefore not primarily a fiscal document. It is a test of political will and institutional seriousness. Stabilisation has bought time. It has not purchased transformation. The underlying growth model — consumption-driven, import-dependent, export-weak, administratively suffocated, and structurally extractive — has failed. Without radical restructuring of both taxation and public expenditure, Pakistan will remain precisely where it has been: stable enough to avoid collapse, too broken to generate prosperity, and permanently vulnerable to the next external shock.
The cloak of Nessus, once worn, began to tighten. Pakistan has been wearing it for a long time now. The question this budget must answer — not to the IMF, but to 240 million people — is whether anyone in authority has finally decided to take it off.
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