Pakistan’s federal expenditure continues to rise despite repeated pledges of austerity and administrative restructuring. Fresh fiscal data for the first quarter of FY26 (July–September) shows that spending on running the civil government jumped 13 per cent to Rs161.2 billion year-on-year — even as the government insists on enforcing cuts and organisational reforms.

This increase is part of a longer trend. Over the past four years, civil administration expenses have expanded by nearly 80pc, according to media reports. While the government abolished over 150,000 posts as part of its “rightsizing” exercise and recently scrapped another 54,000 vacant positions with a projected annual saving of Rs56bn, the overall administrative bill remains stubbornly high.

Pension payments, too, continue their upward march: Rs249.5bn was spent in just the first quarter, 10pc higher than last year and almost 125pc higher than five years ago. Subsidies, which can be deferred, rose sharply to Rs120bn, nearly six times the level of the comparable period last year.

Together, these numbers underscore a structural challenge: austerity on paper has yet to translate into lower spending on the ground. Essential outlays on administration, pensions and subsidies continue to expand, complicating Islamabad’s efforts to regain fiscal space.

Pakistan may not be able to sustain tight monetary policy for long while growth remains weak and debt pressures intensify

The International Monetary Fund’s (IMF) latest review offers Pakistan a moment of comfort but no guarantee of durable recovery. The immediate risk of default has receded, and a fresh $1.2bn disbursement has landed. Yet the economy remains trapped in a narrow stabilisation corridor characterised by low growth, high debt and limited relief for households. GDP growth is projected to rise modestly, according to the IMF — from 2.6pc in FY25 to 3.2pc in FY26.

Labour market prospects mirror this sluggishness. Unemployment is expected to decline only marginally, from 8.3pc to 7.5pc — a reminder that stabilisation without investment seldom produces jobs.

One area where Pakistan has decisively shifted course is inflation. Average inflation, which soared to 28.6pc in July-November 2023, fell sharply to about 7.9pc in July-November 2024 and further eased to just 5pc in July-November this year, according to Pakistan Bureau of Statistics. This easing in inflation rates reflects tight monetary policy, subsidy withdrawal and depressed domestic demand. But the projected uptick shows that price stability remains fragile and reversible.

Fiscal adjustment during stabilisation has been steep. Revenues are expected to rise from 12.7pc of GDP in FY25 to 16.3pc in FY26. Expenditure, however, will remain close to 20pc of GDP, keeping the fiscal deficit high even after a projected narrowing from -6.8pc to -4pc, the IMF report reveals. The primary surplus — expected at 2.5pc — remains the cornerstone of the IMF programme. Yet the broader debt burden continues to cast a long shadow: overall government debt will remain around 72–73pc of GDP, while public and guaranteed debt stays near 76pc.

External accounts offer temporary comfort. The current account is projected to show a brief surplus in FY25 before sliding back into deficit next year. Foreign exchange reserves may rise from $9.4bn to $17.8bn by FY26, improving import cover from 1.6 to 2.7 months — better, but still not resilient.

However, foreign direct investment remains the missing piece, stuck between 0.5pc and 0.6pc of GDP despite improved macro indicators. That said, remittances have provided some strength: inflows reached $3.2bn in November, up 9.4pc year-on-year, with cumulative receipts at $16.1bn during Jul–Nov FY26.

Monetary conditions, however, remain exceptionally tight. Broad money growth is stuck in the mid-teens (around 16pc in FY24 and 13.7pc in FY25). Private-sector credit — expected to improve from 6pc to 15pc — remains constrained by a still high interest-rate environment. The rupee’s real effective appreciation in FY25 has helped stabilise the currency but risks undermining export competitiveness at a time when textiles still anchor the export base.

The broader picture is clear: Pakistan has averted collapse through painful stabilisation, but remains unable to transition to broad-based, inclusive growth. Stabilisation has bought time, not transformation.

A closer reading of the IMF programme explains why the Fund continues to press for structural reforms alongside macro stabilisation. Strengthening the tax base is not simply a revenue exercise — it is central to reconfiguring the state.

Pakistan’s tax structure relies heavily on indirect and withholding taxes, which burden consumers and businesses but do little to expand true tax capacity. Genuine broadening — via agricultural income taxation, market-based real estate valuation and proper taxation of large retailers and services — would ease the fiscal burden and reduce reliance on domestic borrowing.

A broader tax-base means reduced tax-rates, fewer distortions and a more investment-friendly fiscal system.

Yet, a stronger tax base cannot operate effectively within weak and fragmented institutions. Governance failures — from energy distribution and procurement to regulatory clarity and contract enforcement — represent the silent drain on national productivity. Line losses, circular debt, delayed refunds and corruption leakages undermine every reform. Without governance improvements, fiscal and monetary measures leak out of a structurally compromised system.

Reforming and privatising state-owned enterprises (SOEs) remains the most politically difficult and economically decisive. Loss-making SOEs consume vast fiscal resources through bailouts, guarantees and circular debt. These entities depress productivity, crowd out private investment and lock capital in uncompetitive sectors.

This brings us to a critical question: how long can Pakistan sustain tight monetary policy while growth remains weak, and debt pressures intensify?

Published in Dawn, The Business and Finance Weekly, December 15th, 2025