The Pulse | Economy | South Asia

Pakistan Unveils Growth-centric Budget Amid Volatile Geopolitical Landscape

The government expects the external account to remain stable in FY27, particularly via extended tax incentives for the IT sector, a rise in exports and workers’ remittances.

Pakistan’s federal budget for Fiscal Year 2026-27, with a total outlay of approximately $67 billion, has been officially passed by parliament following committee-level amendments. The budget seeks to maintain fiscal discipline while supporting growth in an economy that has been trying to stabilize after facing a severe balance-of-payments crisis in 2023.

The newly passed Finance Bill 2026 will officially come into effect from July 1, 2026, marking the start of the new fiscal year. This means that all financial proposals, new tax measures, duties, and federal spending priorities will be implemented from that date.

The government has asserted that the financial plans for FY27 are prioritized to lay the foundation for “accelerating sustainable growth.”

“The fundamental goal of our government and this budget is export-led growth, which should be sustainable and inclusive, which should increase productivity and create jobs,” Finance Minister Muhammad Aurangzeb told the National Assembly during the budget debate.

Several key macroeconomic indicators suggest that this upcoming fiscal year’s budget framework is explicitly pivoting toward expansion and growth. However, whether this growth-oriented framework that the government is pushing will actually work under tight fiscal constraints remains to be seen.

One encouraging indicator is that the government has sought to shift the focus of fiscal policy toward expanding the tax base rather than imposing additional burdens on existing taxpayers, particularly the salaried class. According to the government, the budget aims to provide relief to salaried workers, exporters, industries, and small businesses while improving tax compliance and enforcement. The compliance and reform measures are mainly being implemented within the Federal Board of Revenue (FBR) through a new operating model aimed at increasing digitization, reducing discretionary powers, and improving transparency in tax administration. The FBR reforms proposed for the next fiscal year’s budget are ambitious, and their feasibility remains open to question. A recent report by the Auditor General of Pakistan revealed that the FBR failed to recover a staggering $2.84 billion in revenue due for the year 2025-26.

The government is signaling confidence. The outgoing year’s 6.6 percent growth in the large-scale manufacturing sector was the highest in the past four years. Keeping this in view, the government has abolished the Super Tax completely in the new budget for businesses with an annual income of up to $1.8 million. This was a heavily criticized tax in the past as it penalized growing industries. Moreover, for major industrial corporations earning above the $1.8 million threshold, the top-tier Super Tax rate has been reduced from 10 percent to 8 percent.

The government also seems confident, as the country’s external account is now stable. The current account recorded a surplus in the first 11 months of the current fiscal year. This means that the government expects the external account to remain stable in FY27, particularly via extended tax incentives for the Information Technology (IT) sector, a rise in exports, and workers’ remittances.

Pakistan’s tech exports rose 20 percent year-on-year to $4.2 billion in the first 11 months of fiscal year 2026. While they are expected to exceed $4.5 billion during the outgoing year, the government hopes this momentum will accelerate further under the new budget’s........

© The Diplomat