Despite repeated claims of “austerity” and “restructuring”, the federal government of Pakistan has failed to discipline its own spending. Instead of curbing wasteful outlays, non-development expenditures have continued to rise during the first four months of FY26, compounding already severe macroeconomic strains.

The cost of running the civil administration alone jumped by 13 per cent, reaching Rs161.2 billion in July–October 2025. Pension payments — a perennial fiscal black hole — have surged over 125pc in just five years, draining taxpayers’ resources without any reforms or pension fund in sight. The result? A jumbo-sized federal government that consistently spends more than it earns, surviving on relentless borrowing and punitive taxation of an already strained private sector.

Regressive taxation – anti growth policies

The Federal Board of Revenue (FBR) has continued to rely on traditional, punitive enforcement measures that are now widely perceived as anti-investment. Despite an 11pc increase in tax collections in the first eight months of FY26 collected Rs8.121 trillion compared with Rs7.334tr in the same period last year, the FBR still missed its revenue target of Rs8.55tr. A staggering shortfall of Rs429bn, even after forced recovery of super tax last month, has severely strained fiscal targets.

Growth in tax revenues becomes meaningless when it is siphoned off to sustain unsustainable recurrent expenditures, rather than being directed towards development and productivity-enhancing sectors. Now, the draconian powers granted to the FBR to raid and arrest business owners without prior cases, have sown deep fears across the private sector. The business community perceives these powers as blatant harassment and “tax terrorism” that undermine investor confidence.

Real growth cannot emerge under policies that punish formal economic activity

Business and investment only flourish in a predictable, conducive environment where enterprises can earn, expand, create jobs, and ultimately contribute more to the tax base. Investors are like pigeons — if they sense fear or uncertainty, they fly away, leaving the alluvial soil of opportunity barren.

If the FBR continues to squeeze industries and exporters to fill revenue gaps, exports — already declining since July 2025 and nosediving in February to $2.27bn (down 25.63pc month-on-month and 8.76pc year-on-year basis) — will suffer even more.

Legacy of populism and subsidies

Successive governments have indulged in excessive non-development spending, vote-driven subsidies, and politically motivated loss-making projects that did generate short-term political capital but sustained financial losses. State-owned enterprises continue to bleed, while politically motivated hiring across dozens of new institutions crowds out merit and rational planning; national priorities remain misaligned with economic needs.

Election narratives offer soothing slogans yet citizens face suffocating energy bills and escalating staple costs. Real household incomes have shrunk, falling an estimated 12pc since FY19, while unemployment has climbed to multi-decade highs. The economy is being throttled by high borrowing costs, dwindling productivity, and anemic growth.

Interest rates and debt servicing cost

Although policy rates have declined significantly from 22pc to about 10.5pc, this “oxygen” arrived only after prolonged strain had pushed the private sector to the brink. The damage is visible: 125 multinational companies have exited the country, foreign direct investment is drying up, rising outflows from the stock market and domestic investment is collapsing under one of the region’s highest real interest rates and energy tariffs. What was designed as an inflation-fighting tool ended up smothering economic activity, stifling investment, and eroding export competitiveness.

According to the State Bank, the policy rate will be held steady at 10.5pc, citing the need to maintain price stability even as inflation pressures ebb. However, these cuts followed a historic peak and belated easing cycle — much of the damage had already been inflicted.

Debt servicing is projected to consume between Rs8.3–8.8tr in FY26, while the government’s net revenue — after National Finance Commission transfers — is unlikely to exceed Rs8tr. This exposes the untenable arithmetic of Pakistan’s public finances, where interest and pension outlays soak up the bulk of revenue, crowding out growth-enhancing expenditures.

Current account pressures and external risk

Pakistan’s current account balance swung from surplus into deficits in FY26. In December 2025, the current account recorded a deficit of $244 million, reversed from a surplus seen earlier in last year. Cumulatively in the first half of FY26, the deficit reached nearly $1.17bn, compared with a surplus of $957m in the same period last year.

The current account deficit may expand after the Israel-US attack on Iran, and Iran’s retaliation. The Strait of Hormuz’s closure has heightened uncertainty in global energy market; Qatar Energy, for instance, has already declared force majeure, shut production and halted supplies of LNG, jolting the global gas market.

Pakistan imports 85pc its of fuel and much of this supply is heavily dependent on Saudi Arabia for oil and Qatar for LNG. The country’s food security is also increasingly import dependent. The declining exports and the maturity of Eurobond payments worth $1.3bn in April may mount further pressure on our foreign reserves and expand the trade deficit and current account deficit in FY26.

The Middle East conflict

The Israel-US military attack on Iran is pushing fuel and commodity prices up as is evidenced by Brent crude now trading near $85 per barrel. If the conflict is prolonged, a severe spike of $30 per barrel would magnify the burden of Pakistan’s annual oil import bill by $4–5bn.

Global food markets are highly sensitive to energy prices because fuel is embedded in agricultural production, transportation, and fertiliser costs. A sustained oil shock could push global food prices upward by 5–10pc. Such external pressures can snowball quickly: larger current account deficits require more external borrowing, adding to debt service burdens.

An overburdened informal economy

A damaging structural contradiction fuels Pakistan’s fiscal and external imbalances: a massive informal economy that operates outside the tax net, coexisting with a shrinking and over-taxed formal sector.

Pakistan’s grey economy has now exceeded the documented sector, yet the FBR remains dependent on a narrow formal base that manages to raise only about 11pc of GDP in taxes. High taxes, expensive energy, unaffordable credit, and compliance hurdles punish formal businesses while informal players thrive on cash transactions with limited regulation.

Hard choices ahead

For Pakistan’s fiscal nightmare to end, policymakers must confront structural contradictions head-on. Austerity and conservation must be a top priority, this includes reining in non-productive spending, broadening and rationalising the tax base, strengthening institutions, and shifting toward a growth-oriented policy framework that promotes investment, entrepreneurship, and export competitiveness.

The writer is a former vice president of KCCI, and a commodities and international trade expert

Published in Dawn, The Business and Finance Weekly, March 9th, 2026