S&P projects wider budget deficit for Pakistan

June 11, 2025 (MLN): S&P Global Market Intelligence has projected Pakistan's overall budget deficit to reach 5.1% of GDP, notably higher than the government's budget estimate of 3.9% of GDP.

Real GDP growth is forecasted at 3.6% for fiscal year 2026, falling short of the official target of 4.2%.

Despite this, relief and targeted measures are expected to provide some protection for lower-to-middle income households and smaller businesses against cost-of-living pressures, particularly as inflation continues to slow.

Consumer price inflation is projected to ease to 3.9% and 6.3% in calendar years 2025 and 2026, respectively.

Furthermore, recovery in the large-scale manufacturing sector is anticipated to become more broad-based and entrenched, reaching 5.7% growth in calendar year 2026.

The outlook highlights that the government’s commitment to fiscal consolidation, as outlined in the budget announcement, aligns broadly with expectations.

This commitment is essential for the coalition government’s objective to sustain progress under the IMF program, which enables access to concessional financing and facilitates rollovers of bilateral repayments from traditionally friendly countries as well as other multilateral development institutions.

As such, the budget improves the likelihood that Pakistan will remain on course with IMF programs and receive timely disbursements, as per the press release issued today.

However, this progress hinges on the successful implementation of the proposed revenue-raising measures by the coalition government.

While widespread civil society resistance is not expected particularly to the proposed carbon tax on fuel localized and sporadic protests in certain cities remain likely.

The revenue target outlined in the budget appears ambitious and has historically not been met.

Any shortfall in revenue generation will likely lead to under-utilization of the already-reduced development spending allocation, with a shift in priority towards current expenditures, especially defense and interest payments.

The increase in defense spending, which was anticipated following recent military escalations, will restrict budget allocations for other crucial sectors like education and health.

Most of the additional defense budget is expected to be used for acquiring military equipment and arms and ammunition, as personnel payments are not included in the defense budget calculations.

Planned acquisitions may include fighter jets and ballistic missile defense systems.

Another concern raised is the heavy reliance on indirect taxation in the announced measures, which may sustain inflationary expectations as businesses pass on the burden to consumers through higher prices.

Taxation policies aimed at the wholesale and retail sectors are also expected to underperform due to the high proportion of undocumented activity within these segments.

This underperformance could adversely affect revenue growth and lead to a fiscal deficit that exceeds the official target.

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