Pakistan has shown signs of overall stabilisation, supported by improved fiscal performance, strengthened external account, and receding inflation. Revenue Mobilization and restrained current spending have contributed to a narrower fiscal deficit and a surplus primary balance.
The current account registered a higher surplus, driven by remittances and export growth, while reserves have improved, and the exchange rate remains stable, aligned with the market. Inflation has reduced to its lowest level, creating space for a more supportive monetary policy in upcoming months.
Although overall industrial activity remained weak. However, automobiles and export-oriented sub-sectors showed an impressive performance. Social protection and climate finance initiatives are progressing, reinforcing the path toward inclusive and sustainable growth. Economic Update & Outlook- April – 2025, Government of Pakistan, Ministry of Finance
The budget for fiscal year (FY) 2025–26, to be presented on June 10, 2025, is set against a backdrop of critical reforms, macroeconomic recovery, and renewed commitments to fiscal discipline. The International Monetary Fund (IMF), concluding its staff visit of Islamabad, headed by Nathan Porter, has provided a direction for budget formulation and broader economic restructuring.
Engaged in serious dialogue and detailed consultations with Pakistan’s federal and provincial authorities, the IMF mission outlined contours of the new fiscal framework, macroeconomic objectives, and structural reforms. The mission acknowledged satisfactory progress and laid out stringent conditions under the US$ 7 billion 37-month Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) programmes.
IMF’s EFF programme’s primary objective is to achieve a primary surplus of 1.6 percent of GDP in FY2026 through robust revenue generation and prioritized expenditure, urging on enhancement in tax compliance, broadening of tax base and rationalization of fiscal spending. The strategic framework agreed upon during this mission now defines the configurations of Pakistan’s forthcoming budget, making it a cornerstone of economic recovery and international confidence.
IMF’s recommendations centered on revenue generation without undermining inclusive growth. Emphasis on expanding the tax base through policy and administrative measures echoed the need to transition from narrow, burdensome taxation to a more equitable and growth-oriented regime.
The Pakistani authorities were advised to limit untargeted subsidies, curtail wasteful expenditures, and ensure targeted social protection. The IMF reinforced the importance of sound macroeconomic policies including maintaining a tight and data-driven monetary stance.
State Bank of Pakistan’s (SBP’s) objective to keep inflation at a minimum level was endorsed, and a flexible exchange rate regime was deemed critical to managing external shocks and rebuilding reserve buffers.
Focus on energy sector reform also featured prominently, particularly addressing ineptitudes in tariff structures, reducing system losses, and ensuring cost-recovery pricing. The fiscal framework was required not only to meet debt sustainability metrics but also to enable pro-investment policies that promote long-term economic stability and job creation.
IMF’s reform recommendations aligned with Pakistan’s economic data reveals both progress and persisting structural flaws. April 2025 Economic Update issued by the Ministry of Finance offers insight into these dynamics. The macroeconomic indicators have shown signs of recovery. Improved revenue performance, moderated inflation, and current account surplus suggest that the economy is gradually transitioning from a crisis management phase to a recovery path.
Fiscal deficit for Jul-Feb FY2025 declined to 2.2 percent of GDP, while primary surplus stood at 3 percent of GDP, indicating prudent fiscal management. Revenue receipts grew by 43.3 percent year-on-year, with a substantial 73 percent surge in non-tax revenues. The Federal Board of Revenue (FBR) collected, after blocking refunds and taking advances not yet due, Rs. 8.45 trillion during Jul-Mar FY2025, reflecting a 25.9 percent increase (sic) as compared to corresponding period of last year. These improvements offer fiscal space that can be strategically directed towards productive expenditure.
The monetary side remains cautiously supportive. Inflation, which stood at 20.7 percent in March 2024, declined sharply to 0.7 percent year-on-year by March 2025, a multi-decade low. Decline in inflation provides policy room for easing monetary conditions, potentially reducing interest burden and supporting credit flows to the private sector.
SBP’s foreign exchange reserves reached US$10.6 billion as of April 2025, contributing to total reserves of US$15.7 billion. The current account posted a US$1.9 billion surplus, supported by export recovery and a record US$28 billion in remittances. These figures highlight a restored balance of payments discipline and reduced reliance on external borrowing.
The industrial sector presents a mixed picture. Large-scale manufacturing (LSM) output remained under pressure with a decline of 1.9 percent in Jul-Feb FY2025. However, segments such as textiles, apparel, and petroleum products showed resilience.
The automobile sector registered significant growth in production, indicating that selective industrial recovery is underway. Cement exports grew by 28.1 percent despite weak domestic demand. These sectoral trends underline the importance of targeted incentives and consistent energy supply to stimulate broader industrial revival.
The agricultural sector, often overlooked in fiscal prioritization, displayed its strength during the Rabi season. Wheat was cultivated on over 22 million acres with an estimated output of 27.9 million tonnes. Agricultural credit disbursement rose by 15.4 percent while imports of agricultural machinery surged by 40.5 percent.
The above trends in agricultural sector reflect early success in mechanization and access to input, supporting the argument for increased public investment in rural productivity. Data from the update supports IMF’s call to expand the agricultural tax net, which remains a politically sensitive but economically necessary reform.
The external sector’s performance supports confidence. Exports rose 7.7 percent to US$24.7 billion, led by garments and textiles, while IT exports surged by 23.7 percent to US$2.8 billion. Remittance inflows showed robust growth from key corridors such as Saudi Arabia and the United Arab Emirates (UAE). Foreign direct investment (FDI) increased by 14 percent, reaching US$1.6 billion, primarily in financial services, energy, oil and gas.
Stock exchange index crossed 117,000 points in March, driven by positive investor sentiment. These trends reflect growing market confidence, aided by macroeconomic stabilisation and policy predictability. IMF’s emphasis on rebuilding investor confidence is thus partially validated by these developments.
IMF’s concern about energy sector inefficiencies is well-placed. The high cost of power generation, transmission losses, and circular debt accumulation have long undermined competitiveness. The budget must respond with a roadmap for tariff rationalization, elimination of cross-subsidies, and improved governance of distribution companies. Power sector reforms must go beyond pricing to address theft, billing inefficiencies, and lack of investment in renewable energy. IMF’s emphasis for cost recovery-based pricing and legislative changes for levies must be operationalized in this budget cycle.
Resilience of the social protection system was also recognized. The government spent Rs 347 billion under Benazir Income Support Programme (BISP) during Jul-Feb FY2025, representing an 82.6 percent increase over the previous year reflecting the commitment to shielding vulnerable households, in line with IMF’s directions on protecting priority expenditures. Continuity of inflation-linked transfers under the Kafaalat programme must be embedded in the budgetary framework. Integration of digital tools in welfare delivery should be expanded to improve targeting and transparency.
The budget must now transform these policy directions and macroeconomic signals into actionable proposals. Priority should be broadening tax base through digitization and enforcement. The FBR should diligently enforce digital invoicing, inter-agency data sharing, and AI-based risk profiling to enhance compliance.
The large undocumented segments in retail, real estate, and agriculture must be brought under the tax net. Simplification of tax procedures, reduction in litigation, and automation of refunds will improve compliance and reduce resistance.
The second priority should be providing relief to the salaried class. Inflation has eroded real incomes, and relief must be extended through upward revision of tax slabs and introduction of indexation. The withholding and advance tax mechanisms must be streamlined to prevent excess collection and delays in refund.
The burden of indirect taxes such as General Sales Tax (GST) disproportionately affects fixed-income households. Reduction of sales tax rates, particularly on essential items and utilities, must be considered. The fiscal space generated by non-tax revenues and improved FBR performance offers room for targeted tax relief.
The third priority is energy sector reform. The budget should announce a timeline for tariff rebasing, reduction of subsidies, and modernization of grid infrastructure. Investment in smart metering and solar integration must be scaled up to reduce technical losses.
The use of petroleum levy must be linked to infrastructure investment in the energy sector rather than general revenue needs. Structural bottlenecks in the energy sector directly affect industry competitiveness and must be addressed holistically.
The fourth priority is stimulating GDP growth through public development spending and private investment. The Public Sector Development Programme must prioritize high-yield projects with employment impact, especially in transport, housing, and rural connectivity. Private sector participation in infrastructure through public-private partnerships should be incentivized via fiscal guarantees and tax relief.
The budget must facilitate credit to small and medium enterprises (SMEs) through interest subvention and guarantee schemes. The government should allocate funds for technology parks, export clusters, and skill training to support job creation and competitiveness.
The fifth priority is building external resilience. The budget must aim to support export diversification through sector-specific incentives and simplification of export procedures. Foreign exchange reserves should be improved by retaining remittance inflows through formal channels via attractive saving instruments.
The incentives for FDI should include tax holidays, contract enforcement guarantees, and repatriation ease. The Board of Investment must be allocated resources for aggressive outreach and facilitation.
The sixth priority must be institutional reform. The budget must include allocations for digitization of land records, integration of National Database & Registration Authority (NADRA) with economic databases and strengthening of regulatory bodies. The anti-corruption agencies must be funded to improve accountability in public spending. IMF’s insistence for governance diagnostics must translate into budgetary measures that strengthen institutions and restore public trust.
Budget for FY2025–26 should not be merely a fiscal document, but a test of political will and administrative capability. IMF’s confidence, validated by completion of the first EFF review and RSF approval, presents a unique window for reforms.
The economic data shows promise, but the transition from stabilisation to growth requires sustained effort. The public expects meaningful relief, the markets expect clarity, and the international community expects reform. The budget must deliver all three.
The government has an opportunity to use this budget as a platform for transformation. Clarity of priorities, alignment with global institutions, and responsiveness to domestic needs can together chart a sustainable economic path. The time for incrementalism is over. The moment calls for ambition, discipline, and action. The future of Pakistan’s economy may well be written in the pages of the FY2025–26 budget.
Copyright Business Recorder, 2025
The writer is MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram. From 1984 to 2003, she was associated with Civil Services of Pakistan
The writer is Advocate Supreme Court, specializes in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He studied journalism, English literature and law. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at [email protected]
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