Pakistan hikes defence budget by 17%, slashes federal spending

June 10, 2025 (MLN): Anticipate that Pakistan will tighten its fiscal belt while expanding its military strength, as the federal government announced a sharp 17% increase in defence spending alongside a 7% cut in overall federal expenditure for fiscal year 2025–26.

The new budget sets total federal spending at 17.57 trillion rupees ($62 billion), while allocating 2.55tr rupees ($9bn) for defence up from 2.18tr rupees in the previous year.

The rise in defence allocation follows last month’s four-day military clash with India, the worst confrontation in nearly 30 years.

The conflict, triggered by the killing of 26 Hindu tourists in Indian Kashmir by Islamist militants in April, led to intense combat involving jets, missiles, drones, and artillery. Islamabad has denied New Delhi’s claims that the attackers were Pakistan-backed.

In addition to the core defence budget, 742bn rupees ($2.63bn) have been earmarked for military pensions, taking the total defence-related outlay to 3.29tr rupees ($11.67bn).

This includes 704bn rupees ($2.5bn) allocated for equipment and other physical assets.

By contrast, India’s defence budget for the same period stands at $78.7bn, including $21bn for equipment.

Prime Minister Shehbaz Sharif, while terming the military exchange a victory, declared, “After defeating India in a conventional war, now we have to surpass it in the economic field.”

The government has projected a budget deficit of 3.9% of GDP, improved from last year’s 5.9% target.

Inflation is estimated at 7.5%, with growth forecast at 4.2% for FY26, compared to an expected 2.7% this year well below the South Asian average of 5.8% in 2024 and the Asian Development Bank’s 6% projection for 2025.

Finance Minister Muhammad Aurangzeb highlighted key reforms, including the planned privatisation of Pakistan International Airlines (PIA), in line with IMF requirements.

He noted that while declining interest rates may support growth, structural challenges remain.

"In short, our budget strategy is to change the economy's DNA by bringing basic changes," Aurangzeb said, outlining goals to boost exports, build reserves, and enhance competitiveness amid uncertainty from new U.S. import tariffs.

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