S&P Global Market Intelligence, a division of S&P Global Ratings, on Wednesday forecast Pakistan to miss the projected GDP growth and revenue collection targets outlined in the proposed federal budget for fiscal year 2025-26.
In a report on its outlook for Pakistan following Finance Minister Muhammad Aurangzeb’s presentation of the budget earlier this week, the financial analytics firm said the revenue target of Rs. 14,131 billion—18.7% higher than that of the outgoing fiscal year—appeared “ambitious” and has “historically been under-achieved.” It noted the anticipated shortfall would encourage under-utilization of the development spending allocation, already reduced to just Rs. 1,000 billion. At the same time, it said, current expenditures, particularly and defense and interest, would likely receive higher priority.
Further, the report has forecast real GDP growth for the upcoming fiscal year at 3.6% against the government’s targeted 4.2%. It has predicted the overall budget deficit to be 5.1% of GDP, higher than the budgeted estimate of 3.9% of GDP.
According to S&P Global Market Intelligence, the relief and targeted measures would “to some extent” shield lower-to-middle income households and smaller businesses against cost-of-living pressures, especially as inflation slowdown continues and overall consumer price inflation eases to 3.9% and 6.3% in 2025 and 2026, respectively. Validating some of the government’s expectations, it has projected large-scale manufacturing sector recovery to become more broad-based and entrenched, at 5.7% in calendar year 2026.
The report notes the commitment to fiscal consolidation is broadly in line with expectations as the country remains under an IMF program. “The budget therefore improves likelihood that Pakistan will stay on course the IMF programs, receiving timely disbursements,” it said. However, it warned, this was dependent on the coalition government’s implementation of revenue-raising measures. The report said it did not expect widespread opposition to these revenue-raising measures if implemented, especially against the carbon levy.
On the higher defense spending allocation, S&P Global Market Intelligence said it would likely constrain spending for other critical sectors such as education and health. The additional budget, it said, would likely be used to acquire more military equipment and arms and ammunition. New defense acquisition is most likely to include purchases of fighter jets and ballistic missile defense systems, among others.
The report has voiced concern over a heavy reliant on indirect taxation, stressing this would keep inflationary expectations strong, with businesses likely to pass on the impact to consumers through higher prices. “Tax policies targeting the wholesale and retail segments are also likely to underperform, given the high share of undocumented economic activity in the segments,” it said, warning this could adversely impact revenue growth and widen the fiscal deficit beyond target.