Pakistan’s budget of managed expectations

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Pakistan’s government delivered its budget last week with the now-familiar language of turning points. Growth would reach 4 percent. Revenue would surge by nearly 18 percent. Private investment would finally accelerate. The numbers have the look of a plan. They do not have the feel of one.

Start with the growth record. In FY2023, Pakistan’s GDP grew by just 0.3 percent. In FY2025, the economy grew 2.7 percent, a revision down from a 3.6 percent target. In the fiscal year just ended, GDP came in at 3.7 percent, falling short of the 4.2 percent target announced in the prior budget. The pattern is consistent: the government announces an ambitious number, the economy delivers something smaller. The FY2027 target of 4 percent is not a forecast derived from identifiable policy levers. It is a number that sounds attainable while requiring more than the economy has recently demonstrated.

What would it take to reach 4 percent? Investment, primarily. Pakistan’s investment-to-GDP ratio has stagnated at around 14 percent, far behind Bangladesh at 22 percent, and Vietnam at over 30 percent. But the level alone does not capture the full problem. Pakistan’s incremental capital-output ratio, the investment required to generate each unit of growth, has historically ranged between 4 and 6. At 14 percent investment and an ICOR of even 4, the arithmetic ceiling on sustainable growth is roughly 3 to 3.5 percent. With population growing at around 2........

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