KARACHI: The federal government is expected to present a Rs16.9 trillion budget for fiscal year 2025–26, down by 10.6% or Rs2 trillion from the Rs18.9 trillion budgeted for FY25, according to a report by Arif Habib Limited (AHL).
The cut is primarily driven by a significant decline in debt servicing costs, as the State Bank of Pakistan’s policy rate has halved to 11% from 22% last June, leading to a drop in markup payments to Rs8.5 trillion from Rs9.8 trillion previously budgeted.
“The upcoming budget is likely to be more balanced, focusing on fiscal discipline and targeted relief,” said AHL Head of Research Sana Tawfik.
AHL forecasts a fiscal deficit of Rs6.2 trillion in FY26, with gross revenues estimated at Rs17.8 trillion. After provincial transfers of Rs8.04 trillion and a provincial surplus of Rs950 billion, net federal revenues are projected to align with these deficit estimates.
FBR revenues for FY26 are projected at Rs14.3 trillion, reflecting a modest rise driven by new taxation measures including:
GST on petroleum products at 3%
Income tax on retailers and wholesalers
Withdrawal of tax exemptions for FATA/PATA regions
The tax-to-GDP ratio is expected to improve to 11.3%, up from 10.3% in FY25. AHL also estimated the federal PSDP at Rs1.1 trillion and PDL collection at Rs1.4 trillion.
On the expenditure side, the government is budgeting current expenditures at Rs16.2 trillion, thanks to the lower interest burden. However, a dip in non-tax revenue, notably from lower expected SBP profits (Rs1.5 trillion), could strain fiscal space.
AHL projects GDP growth at 3.6% in FY26, up from an estimated 2.68% in FY25, with average inflation seen rising to 6.29%. The current account is expected to swing to a $1.5 billion deficit in FY26 from a projected $1.6 billion surplus this year.
The report anticipates no tax amnesties, further progress on circular debt resolution, and reforms under the National Fiscal Pact aimed at devolving spending to provinces.
Overall, AHL sees the FY26 budget as neutral to positive for economic stability and investor sentiment, with continued alignment to IMF conditions. The government is scheduled to present the budget on June 10.
