UNDP sounds alarm over cracks in Pakistan's economic stabilization

May 28, 2026 (MLN): Pakistan's  economic recovery faces mounting pressure from resurging inflation, a deepening revenue shortfall and unresolved structural weaknesses, the United Nations Development Programme cautioned in a comprehensive fiscal review presented to the National Assembly Standing Committee on Finance and Revenue ahead of Budget 2026-27.

The assessment, drawn from Q3 fiscal data and the IMF's latest country review, painted a sobering picture of an economy that has achieved key stabilization milestones but remains acutely vulnerable to slippage  and warned that without deeper reforms, Pakistan risks renewed dependence on external financing.

Stabilization Gains, But Fragile

The UNDP acknowledged significant progress. Forex reserves stood at $22.58 billion as of May 15, 2026, providing 2.58 months of import cover. Remittances are projected to reach $41.2 billion accounting for roughly 9% of GDP with 55% sourced from Gulf Cooperation Council countries.

The policy rate has been reduced to 11.5% following cumulative cuts of 1,200 basis points since June 2024.

GDP growth is estimated at 3.75–4.75% for FY2026 by the State Bank of Pakistan, with Q3 growth recorded at 3.99%. The IMF itself described Pakistan's overall fiscal performance as "exceptional," noting that the first-half primary surplus of Rs4.1 trillion  equivalent to 3.2% of GDP exceeded the programme target of Rs3.3 trillion.

Yet the review cautioned that these gains rest on increasingly unstable foundations.

The Federal Board of Revenue missed its third-quarter target by Rs610 billion, collecting Rs9.304 trillion  only 66% of the budget estimate  through Q3 of fiscal year 2026. The gap has pushed the projected fiscal deficit to approximately 5.8% of GDP, nearly a full percentage point above the 5% ceiling set under the IMF programme.

To bridge the shortfall, the government has leaned heavily on non-tax revenues, including State Bank of Pakistan profits and petroleum development levy collections, which the UNDP described as an "unsustainable non-tax cushion" that is artificially masking the FBR shortfall. Year-end tax collection is projected at Rs13.19 trillion  below the IMF's strict target of Rs13.457 trillion.

The FBR's revenue target for fiscal year 2026-27 has been set at Rs14.13 trillion  requiring 21% growth  a figure widely regarded as highly ambitious. Pakistan's tax-to-GDP ratio, while improving, still trails regional peers: India stands at 18%, against Pakistan's average of around 9.5% over the past two decades, though the ratio has now exceeded 12% when petroleum levy and provincial taxes are included.

IMF Programme: Mixed Compliance

Pakistan's performance under the IMF's Extended Fund Facility presents a mixed picture. Of seven Quantitative Performance Criteria, only three were met, while four  including the ceiling on the general government primary budget deficit and the floor on FBR net tax revenues  remain inconclusive pending assessment. Of eight Indicative Targets, only one was fully met, with two confirmed as missed: the floor on FBR net tax revenues and the ceiling on power sector payment arrears.

The UNDP noted that the government's IMF compliance is being partly propped up by provincial fiscal surpluses, which contributed 1.3% of GDP and are keeping the federal programme on track. It is recommended that the Standing Committee formalize stricter provincial expenditure limits to prevent fiscal slippage in FY27.

Consumer inflation climbed back to 10.9% in April 2026 reversing an earlier decline and reigniting cost-of-living pressures. The Sensitive Price Index stood at 14.42% year-on-year as of May 14. The rise was concentrated in essential commodities, with onion prices surging 68.3%, petrol up 62.2%, diesel 60.9%, wheat flour 59.4%, LPG 50.7% and electricity charges 43.3%.

Looking ahead, the IMF projects FY2027 inflation at 8.4%, considerably above the ADB's more optimistic forecast of 6.4-6.5%  a divergence the UNDP attributed to uncertainty around oil prices and energy tariff pass-through risks.

A particularly worrying signal came from the export front: exports fell 6.25% year-on-year in the first ten months of FY2026 to $25.2 billion. Pakistan's export-to-GDP ratio of 9-10% lags significantly behind Bangladesh at 12% and Vietnam at 85%, with the UNDP noting a near-total absence of export diversification.

The trade deficit widened to $32.19 billion between July and April of FY2025-26, driven by rising imports and weak export momentum. Pakistan sources approximately 90% of its energy from the Middle East, leaving it acutely exposed to regional shocks  a risk the review described as "non-trivial," warning that oil at $100-120 per barrel would sharply widen the current account deficit and pressure the rupee toward Rs295 or beyond.

Structural Imbalances Persist

The review highlighted a spending structure heavily skewed toward current expenditure, with the ratio of current-to-development spending standing at 96:4. The bulk of federal outlays are consumed by debt servicing and recurring costs, leaving minimal resources for infrastructure, education and healthcare. Gross public debt stood at Rs83.28 trillion as of March 2026, with external debt at $137.56 billion. The government has allocated Rs8.2 trillion for debt servicing in FY2026.

Circular debt in the energy sector remains a major liability, with power sector arrears at Rs1.76 trillion and gas sector debt at Rs3.44 trillion. Distribution companies continue to accumulate losses, and the pace of state-owned enterprise reform was described as insufficient to prevent fiscal contingent liabilities from materializing.

The UNDP presentation also flagged the burden of telecommunications taxation as a structural drag on growth. It recommended reducing the Advance Income Tax on mobile services from 15% to 8%, harmonizing the GST on telecom services nationally to 18%, and removing the punitive 25% levy on devices above $500  arguing that affordable digital access is "a national development imperative," not a fiscal concession.

On the energy transition front, the review noted Rs37 billion collected via the Carbon Levy in FY2025-26 and Rs9 billion allocated to subsidise electric vehicles under the PAVE programme, while cautioning that several fiscal incentives in this space are misallocated or ineffective in practice.

For Budget 2026-27, the UNDP recommended reducing both personal and corporate income tax rates to stimulate growth, abolishing the Super Tax and Capital Value Tax, expanding e-invoicing, deploying AI-based bank-FBR data matching, and enforcing track-and-trace systems to combat fake tax stamps. It also called on the government to publish a three-to-five-year tax reform roadmap.

While Pakistan achieved important stabilization milestones including earlier inflation relief, reserve rebuilding and a primary fiscal surplus the recovery remains fragile and unevenly distributed.

Without deeper, sustained reforms in taxation, energy, development spending and export competitiveness, the review warned, Pakistan risks renewed pressure on its external accounts and a prolonged cycle of IMF dependence.

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