Pakistan in 2025

Pakistan in 2025
Pakistan Budget 2025-26
Legislating stabilisation under IMF discipline and coalition constraints

CWA #1974

Vani Vyshnavi Jupudi
31 December 2025
Photo Source:

Pakistan’s FY2025-26 federal budget, presented on 10 June 2025, is best understood as a stabilisation package drafted to satisfy IMF programme benchmarks while remaining politically survivable for a coalition government. The government operates under strict financial constraints because total federal spending amounts to PKR 17,573 billion while the budget sets a 3.9 per cent GDP target for fiscal deficit and a 2.4 per cent GDP target for primary surplus and uses PKR 1,464 billion as provincial cash surplus.

The political risks in this budget stem from its design which requires major funding categories to be fixed in place while the government must achieve budget targets through controlling subsidies and slowing down development projects and implementing complex revenue collection systems. Interest payments alone are PKR 8,207 billion, and defence affairs and services are PKR 2,550 billion, out of the total PKR 17,573 billion.

The macro environment established conditions which made it difficult to execute political adjustments. The disinflation process in Pakistan created a need for economic relief at the same time when the IMF required the country to maintain its current fiscal limitations. Reuters and IMF communications throughout 2025 presented the situation as a recovery process which brought new security challenges while the IMF confirmed in its December 2025 review that stability needed faster reforms despite positive stabilization trends.

What happened in 2025?
On 09 May 2025, the IMF executive board completed the first review under Pakistan’s extended fund facility and approved the resilience and sustainability facility, signalling programme continuity and widening conditionality into climate and resilience governance. The government presented the FY2025–26 budget on June 10th 2025 which allocated Rs17.573 trillion for total expenses and established a 4.2 percent growth objective and made budgetary stability and major revenue acquisition its main priorities. The defense funding received more money but the overall military budget decreased compared to the previous year. The main obstacle became apparent on 12 June 2025 because revenue statistics had already reached a point where they could not be changed according to IMF requirements. The government would need to implement new tax policies if officials relaxed their current enforcement strategies. The budget shows its core disagreement through its creation of strict performance targets which will encounter political obstacles when put into practice. The FBR enforcement proposals which the parliamentary panels evaluated on 17 June 2025 received either complete rejection or partial opposition from the panels. The project team received this information which made it clear that tax administration and compliance design would experience the highest level of implementation risk. The Finance Act framework enabled the budget to become law during late June 2025 which turned the discussed objectives into actual implementation and public acceptance of enforcement activities.

On 08 December 2025, the IMF completed the second EFF review and first RSF review, allowing an immediate disbursement of around USD 1 billion (EFF) and USD 200 million (RSF), bringing total disbursements under the two arrangements to about USD 3.3 billion. On 10–11 December 2025, Pakistan’s central bank confirmed receipt of SDR 914 million (about USD 1.2 billion).

What are the challenges?
First, the problem exists at two levels because most available fiscal resources already have established funding destinations. The budget requires significant adjustments because interest payments (Rs8,207 billion) and defence expenses (Rs2,550 billion) use up most of the available funds. The government must make budget cuts from three sensitive areas which include subsidy programs and development funds and tax revenue. The budget contains triage information because it safeguards creditor rights and security funding yet makes households and businesses and local governments responsible for paying the costs of stabilization measures.

Second, the budget is solving a credibility problem where targets must survive implementation, not just announcement. The government has set its FBR tax target at Rs14,131 billion which demands better tax enforcement and compliance from a country that maintains a substantial unregulated economic sector. The June enforcement pushback showed that parliament members encountered barriers because they refused to support enforcement methods which involved using forceful measures such as arrests and building checks. The state maintains its revenue target as a written commitment but lacks essential implementation tools which creates an instrument gap that could lead to hasty decisions during the middle of the year.

Third, the budget system works to reduce political shock absorbers which represent sensitive budget items. The subsidies line in the financial report shows lower values during FY2025–26 than the revised FY2024–25 outturn and the budget follows a standard financial reporting structure. The government depends on subsidy control as its primary tool for expense management because defense costs and interest expenses show no change. The political situation becomes critical because people view subsidy reductions as price increases which lead to higher living expenses during a period of declining inflation rates. The budget must manage energy sector liabilities because these financial obligations keep appearing in the fiscal system through indirect fiscal channels. Pakistan’s power sector debt pressures have been handled at various points through refinancing and restructuring rather than only through tariff adjustments and governance reform. Reuters published a June 2025 report which showed USD 4.5 billion local bank loans used to reduce power sector debt as an example of financial engineering-based stabilisation instead of actual structural debt solutions. The problem this budget is solving, then, is not only annual expenditure control but the containment of liabilities that can destabilise the fiscal path without appearing as a single line item.

The budget addresses a single fiscal arithmetic problem which depends on how provinces will behave. The assumed provincial surplus of Rs1,464 billion is central to the deficit and primary balance path. The IMF program requires provinces to show consolidated performance results but their political situation creates challenges for the central government to implement its stabilization plan.

What are the implications?
First, implication shows that FY2025-26 establishes a stability framework which relies on IMF assessment standards to evaluate its creditworthiness. The deficit and primary balance targets function as macro indicators which determine how policies should be implemented and when to release funds and how financial markets will react. The actual political space where decisions get made exists in the process of implementation because fixed expenses prevent any budget shortfalls from affecting development programs which then force businesses to withhold more money and create more documentation needs and drive them to use more indirect taxes.

Second, the allocation structure shows that different groups bear unequal amounts of responsibility. Media outlets on budget day reported about the budget consolidation trend while journalists discussed which groups would bear the financial burden of the budget. The Reuters news organization reported that defense spending increased while the total government budget decreased according to their analysis. The budget contains built-in distributional politics which establishes protected core areas while it reduces available resources in peripheral areas. The situation reaches its peak because coalitions face their most dangerous point when adjustment costs impact visible public groups which include consumers who must pay tariffs and documented taxpayers who face increased enforcement while their influential supporters maintain their protection. The June 2025 tax enforcement dispute shows Pakistan now deals with increasing institutional legitimacy issues instead of its previous technical problems with tax enforcement. The business community used harassment language to defend their interests which resulted in Parliament weakening the FBR's authority to arrest people and collect taxes. The system generates a typical financial pattern which depends on established groups for revenue while it requires more documentation and it strengthens public beliefs about discriminatory treatment which threatens the political stability of the program. The IMF relationship in 2025 shows continued partnership between organizations while they tackle new responsibilities. The May and December decisions maintained financial stability but the RSF introduced new conditions which link funding to climate resilience and governance performance thus making domestic policies more vulnerable to external control. (IMF) The political process enables governments to use economic reforms as tools for control because the IMF imposes its own policies when countries need financial assistance during their disinflationary periods.

What next?
First, instrument substitution under “locked targets.” This is a sharper version of negotiated slippage. The main characteristic involves instrument changes because the original enforcement package becomes impossible to implement through political means. The system will implement state-based measures through June 2025 committee pushback and arrest power limitation requests to reduce coercive tools by blocking new tool introductions and making all transactions require documentation and establishing business monitoring systems for existing business operations. The risk creates a legitimacy spiral which leads to discriminatory law enforcement practices while organizations that follow regulations must deal with increasing regulatory requirements and political opposition grows stronger thus reducing available policy choices.

Mid-year fiscal management through “compression cycles.” The budget follows this path because it contains pre-commitment funding. The implementation of interest and defence policies which cannot be changed results in mid-year adjustments which produce PSDP reduction and delayed project releases and restricted administrative activities instead of traditional policy changes. The budget document reveals its decision-making process through its display of defense costs and mark-up expenses which exceed current spending levels yet development and subsidy funding remains limited. Organizations use their main performance metric to track how fiscal management produces sustained connections between development challenges and delayed payments which help achieve IMF targets but harm both national development and public institution stability.

Consolidated slippage via provincial under-delivery. The analysis follows the projected Rs1,464 billion surplus which provinces are believed to have. The centre needs to either strengthen federal revenue collection or reduce federal spending to defend its consolidated targets before the IMF conducts its reviews when provinces fail to meet their targets. The political system holds essential power because fiscal calculations between coalition members develop new conflicts. The provincial governments will defend their existing budget allocations because the central government needs to fulfill IMF evaluation criteria which disrupts their ability to sustain their current programs.

Energy-sector stabilisation through balance-sheet engineering. Here the stabilisation bargain is maintained by shifting energy liabilities into financial structures rather than resolving them structurally. The Reuters report about USD 4.5 billion bank loans demonstrates this financial process which provides short-term cash relief to reduce budget expenses and political pressure but creates future repayment responsibilities and potential financial risks. The path leads to IMF review success during this time but it creates future risks because distribution loss reform and governance improvement and pricing control measures need to develop at a proper pace.

To conclude, the budget was designed to make stabilisation durable by turning it into enforceable fiscal law under an IMF review architecture. The main conflict between these two systems exists in their fundamental design because their fixed spending requirements force them to make budget changes through subsidy programs and development funding and revenue collection methods which become targets for political disputes. The main decision point during FY2025–26 focuses on which political stabilization agreement will work because the real issue is not about stabilization intentions but about finding a stable agreement. The political sustainability of three stabilization options needs to be determined because they include replacing instruments without losing public trust and maintaining strict discipline without breaking the bond between the central government and local authorities and controlling energy usage to decrease financial responsibilities instead of using borrowed money for repeated payments. The IMF program maintains financial support while continuing the existing plan but the coalition members will decide which adjustment tools will remain effective enough to achieve actual results.

References
Ministry of Finance, Government of Pakistan, “Federal Budget 2025–26: Budget in Brief,” 10 June 2025
https://www.finance.gov.pk/budget/budget_2025_26/budget_in_brief_10062025.pdf
Ministry of Finance, Government of Pakistan, “Annual Budget Statement (Federal Budget 2025–26),” 10 June 2025
https://www.finance.gov.pk/budget/budget_2025_26/abs_eng_10062025.pdf
Muzhira Amin, “‘Short of Structural, Bold Reforms’: Finance Experts Unpack Budget 2025–26,” Dawn, 10 June 2025
https://www.dawn.com/news/1916314
Irfan Sadozai and Tahir Sherani, “Budget FY26: Pakistan Targets 4.2pc Growth, Slashes Overall Spending,” Dawn, 10 June 2025
https://www.dawn.com/news/1916292
Khaleeq Kiani, “Budget 2025–26: Threat of Rs500bn Tax Hike if Enforcement Measures Diluted,” Dawn, 12 June 2025
https://www.dawn.com/news/1916663
Mubarak Zeb Khan, “Excessive Powers to FBR Rejected,” Dawn, 17 June 2025
https://www.dawn.com/news/1917619
Mubarak Zeb Khan, “Guardrails Sought to Stop Misuse of FBR Arrest Powers,” Dawn, 17 June 2025
https://www.dawn.com/news/1917564
International Monetary Fund, “IMF Executive Board Completes First Review of the Extended Fund Facility Arrangement with Pakistan and Approves Request for an Arrangement under the Resilience and Sustainability Facility”,  9 May 2025
https://www.imf.org/en/News/Articles/2025/05/09/pr-25137-pakistan-imf-completes-1st-rev-of-eff-arrang-and-approves-req-for-arrang-under-rsf
International Monetary Fund, “IMF Executive Board Completes Second Review of the Extended Arrangement under the Extended Fund Facility and First Review under the Resilience and Sustainability Facility with Pakistan”, 8 December 2025
https://www.imf.org/en/news/articles/2025/12/08/pr-25411-pakistan-imf-completes-2nd-rev-of-ext-arrange-eff-and-1st-rev-of-arrange-rsf
International Monetary Fund, “Pakistan: Second Review under the Extended Arrangement under the Extended Fund Facility”, 2025
https://www.elibrary.imf.org/view/journals/002/2025/332/article-A000-en.pdf
Reuters, “Pakistan to Cut Overall Spending but Raise Defence Budget in 2025–26, Source Says,” Reuters, 10 June 2025
https://www.reuters.com/sustainability/land-use-biodiversity/pakistan-cut-overall-spending-raise-defence-budget-2025-26-source-says-2025-06-10/
Ariba Shahid, “Pakistan Signs USD 4.5 Billion Loans with Local Banks to Ease Power Sector Debt,” Reuters, 20 June 2025
https://www.reuters.com/sustainability/boards-policy-regulation/pakistan-signs-45-billion-loans-with-local-banks-ease-power-sector-debt-2025-06-20/
Business Recorder Desk, “Pakistan Receives USD 1.2bn from IMF, Confirms SBP,” Business Recorder, 11 December 2025
https://www.brecorder.com/news/40396915
Associated Press Desk, “IMF Approves USD 1.2 Billion for Pakistan, Citing Progress on Economic and Climate Reforms,” Associated Press, December 2025
https://apnews.com/article/54d10f9462db9df33e2094cb21953cd5
KPMG Pakistan, “Budget Brief 2025,” June 2025
https://assets.kpmg.com/content/dam/kpmg/pk/pdf/2025/06/Budget_Brief_2025.pdf


About the author
Vani Vyshnavi Jupudi is an undergraduate student at CHRIST (Deemed to be university), Bengaluru.


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