By Staff Reporter
ISLAMABAD: Pakistan has set a 4% economic growth target for the fiscal year beginning July, nudging higher from an estimated 3.7% this year, even as a surge in global oil prices triggered by the US-Iran conflict strains inflation and the government acknowledges it has virtually no money left to fund new development projects.
The macroeconomic framework for FY2026-27 was cleared Monday at a meeting of the Annual Plan Coordination Committee, chaired by Planning Minister Ahsan Iqbal, and is scheduled for formal ratification by the National Economic Council on June 3. The NEC, led by the prime minister and attended by all four provincial chief ministers, is the country’s highest economic policymaking body.
The headline growth number, however, obscures a more uncomfortable reality. After accounting for existing project commitments and a Rs180 billion ($643 million) budget cut carried forward from the current fiscal year, the government’s Public Sector Development Program — the primary vehicle for funding roads, dams, hospitals and energy infrastructure — is effectively in deficit by Rs15 billion before a single new allocation is made.
“And if out of this 165 billion, you deduct the 180 billion rupees of the cut that has been imposed, then the PSDP goes into a deficit of negative 15 billion rupees,” Iqbal said while addressing the APCC. “There is hardly anything you can give to any new project.”
A Budget Under Siege
The PSDP has been allocated Rs1.126 trillion for FY2027. Ministries, however, submitted funding requests totaling Rs4.097 trillion — including Rs3.377 trillion to maintain existing projects at current pace and Rs720 billion for new schemes. An additional Rs5.5 trillion in unapproved project proposals is sitting in a queue for possible future consideration.
The arithmetic is unforgiving. The government will have to reject approximately Rs3 trillion in spending demands outright.
“Which means that almost, you know, we will have to disapprove them, and we have to selectively make an allocation of only 1,126 billion out of 4,000 billion,” Iqbal said. “This is a task which is very unpleasant.”
He noted that when stripped of ring-fenced allocations — including Rs125 billion for the N-25 highway in Balochistan and mandatory local-currency co-financing for World Bank and Asian Development Bank projects — the effective available PSDP stands at roughly Rs1 trillion ($3.6 billion), a figure Iqbal said was broadly unchanged in nominal terms from 2018, despite years of inflation, population growth and mounting infrastructure needs.
“That there is not much of development — this is not, I would say, a happy state for any nation because we need to invest more in development,” he said.
Pakistan narrowly avoided a sovereign default in 2023 and has since been operating under a $7 billion IMF program that has stabilized the currency and rebuilt foreign exchange reserves but has left little room for expansionary fiscal policy.
Sector Targets and the Growth Math
The growth framework assumes broad-based expansion, though the targets come with explicit caveats from the Planning Commission, which warned they are “contingent on effective macroeconomic management and stable external conditions.”
Agriculture is projected to grow 3.8%, recovering from an estimated 2.9% this year, led by a sharp rebound in key crops — forecast at 3.6% growth, up from just 0.6% in FY2026 — and steady livestock expansion of 3.9%.
The industrial sector is targeted to grow 4%, with large-scale manufacturing moderating to 4.5% after posting an estimated 6.1% expansion this year, a sharp turnaround from a contraction of 0.7% in FY2025. Construction activity is projected to slow considerably, to 2.2% from 5.7%, reflecting tighter capital availability.
Services, the economy’s largest component, is targeted to grow 4.2%, with the information and communication segment projected to expand 7.7% — among the fastest of any sub-sector — and financial services growing 4.5%.
On investment, the framework targets total investment at 15% of GDP, up from 14.4% in the current fiscal year. Private investment is projected to rise to 10.3% of GDP from 9.6%, while public investment holds at 3% of GDP. National savings are targeted at 14.3% of GDP, marginally above the 14.1% estimated for this year. The Planning Commission described the narrowing savings-investment gap as one to be financed through “modest external inflows.”
The APCC also set a target of two million new jobs in FY2027, distributed as 1.1 million in services, 500,000 in industry and 400,000 in agriculture.
The Oil Shock and the Inflation Problem
Pakistan’s economic stabilization story this year was materially disrupted by the outbreak of the US-Iran conflict in late February 2026, which sent global crude prices surging from approximately $72 per barrel to a peak of nearly $120 per barrel. The shock rekindled inflationary pressures in an economy that had, in the first half of the fiscal year, appeared to be successfully consolidating price stability.
Average inflation during July–April of FY2026 rose to 6.2%, compared with 4.7% in the same period of the prior year. Month-on-month, the contrast was starker: inflation hit 10.9% in April 2026 against just 0.3% in April 2025. Inflation for FY2027 has been targeted at 8.2%, premised on continued fiscal consolidation and improved macroeconomic stability — assumptions that carry meaningful execution risk given the external environment.
Overall, GDP growth for the current fiscal year came in at 3.7%, up from 3.2% in FY2025 but falling short of the 4.2% target set at the start of the year. Growth for FY2025 had itself been revised down from earlier estimates before settling at 3.2%.
External Risks Linger
The Planning Commission flagged the external account as a source of vulnerability heading into next year. Easing import controls and scheduled external debt repayments are expected to widen the current account deficit. However, it said robust remittances, a recovery in goods exports and anticipated external financing flows should contain the pressure.
On the trade side, weakening exports and a pickup in import demand have already contributed to a wider trade deficit this year, partially offset by strong remittance inflows and growing services exports — a trend the government is counting on to continue.
The Planning Commission noted that despite the challenges, fiscal discipline and improving investor sentiment had driven Pakistan’s stock market to record highs, and that foreign exchange reserves and exchange rate stability had improved materially heading into the budget season.
The federal budget for FY2026-27 is expected to be presented later this week.
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