ISLAMABAD: As the federal government plans to table the budget for 2025-26 after Eidul Azha, an economic round-up shared by an Islamabad-based think tank urged the government to prevent “bad growth”, highlighting that Pakistan’s economy has faced similar challenges in the past.
A report by Tabadlab advised against increasing tax rates, saying they were already among the highest in the region. It also cautioned against consumption-led growth due to insufficient forex reserves. “Forex reserves are low (only two months of imports, as of June 3) to open up all imports. Has been done before: causes boom-and-bust cycles,” it added.
However, it observed most key indicators have largely stabilised, but the economy remains fragile to external shocks.
Inflation decelerated to 5 per cent, the interest rate was cut from 21pc to 11pc, the rupee settled around Rs280 against the US dollar, and the risk of default subsided as debt didn’t grow at a high rate, the report noted.
Tabadlab advises against increasing tax rates in budget FY26
It attributed this stability to the government’s “unprecedented discipline”, “austerity” and “some luck” in the form of favourable global conditions, such as low oil prices, while acknowledging that there was improved alignment and contribution across the government.
It said the Federal Board of Revenue’s (FBR) Rs13 trillion tax target is expected to fall short by Rs1tr — but still Rs3tr more than the Rs9tr target from last year.
The policy rate cut from 21pc to 11pc reduced the debt servicing cost by Rs1tr, whereas the austerity measures impacting the public sector development funding “saved Rs1tr”. Initially, the budget had set Rs1.4tr PSDP target, which was revised to Rs1.1tr, but only Rs0.45tr has been spent in 2024-25.
The cost of “economic stability and austerity is significant”, the report said, pointing to a rise in poverty, increased by 6.5pc over the past seven years — and 8pc unemployment rate. Similarly, the healthcare spending also declined.
However, despite some of these stabilising measures, Pakistan is vulnerable to “twin deficits” that persist. Tax base remains narrow, which limits revenue growth and the country does not generate enough foreign exchange reserves to afford imports. The tax-to-GDP ratio is 10.6pc while the target for sustainable growth is 13pc, it added.
‘Smart play’
The report said core economic indicators are expected to follow a steady trajectory over the next years, but the government could accelerate growth through reduction in the policy rate from 11pc to 9pc, sector-specific interventions (agriculture, construction sectors), an increase in the PSDP spending, reduction in import tariffs, and fiscal relief, such as the withdrawal of ‘super tax’ and changes to the income tax slabs.
It said the imports will strain the current account deficit but the customs revenue “will hold steady” and a decline in interest rate could save Rs1tr by 2026. It, however, did argue that the government should continue to manage import growth to discourage “excessive imports”, as was the case in 2022.
Published in Dawn, June 5th, 2025
