The hybrid government is set to present the next fiscal year’s budget at a moment when Pakistan has accumulated notable additional diplomatic capital yet finds itself constrained by deep domestic polarisation and a level of public trust that has not kept pace with its external gains.
While recent macroeconomic indicators suggest tentative stabilisation, the deeper foundations of the economy remain burdened by severe fiscal constraints, external vulnerabilities and persistent structural inefficiencies.
Following the International Monetary Fund’s (IMF) completion of the third review under the $7 billion Extended Fund Facility (EFF), Islamabad’s fiscal path has become tightly bound to strict reform targets and surplus requirements.
Policymakers are now attempting to balance economic stabilisation with rising political and social pressures, as the cost of adjustment falls on ordinary citizens. In the FY27 budget, debt servicing remains the ultimate fiscal constraint, with total interest payments projected at approximately Rs7.8 trillion.
While this exceeds 45 per cent of total estimated federal revenues, it consumes nearly 80pc of net federal revenues after provincial transfers. Despite strictly maintaining a high primary surplus of 2pc of GDP under non-negotiable IMF conditions — largely supported by provinces surrendering cash surpluses — the country’s structural debt burden means the overall fiscal deficit is still expected to settle around 3.5pc of GDP.
Despite a temporary price easing earlier this year, Pakistan is bracing for renewed inflationary pressures in FY27
The upcoming budget faces a strict IMF-mandated federal revenue target of Rs17.15tr. To close the gap, the government plans Rs430bn in new revenue measures, anchored on an 18pc hike to the petroleum levy, laying additional tax burdens directly on base fuel costs. Provincial governments, meanwhile, must generate an additional Rs400bn via agricultural income tax and expanded services general sales tax to maintain a mandatory 1.4pc GDP cash surplus. Both federal and provincial moves would certainly add to inflationary pressures.
Domestically, Islamabad might be stabilising its books, but Pakistan’s external sector is still dangerously tied to Middle Eastern geopolitics. The Gulf region supplies 81pc of the country’s fuel imports and generates 55pc of its remittances. Any major escalation there instantly threatens Pakistan’s energy security and its primary source of foreign currency.
Meanwhile, foreign direct investment (FDI) has already plummeted 31pc in 10MFY26, driven by political risk and economic anxiety.
Worse, a projected $32bn trade deficit threatens to erase recent current account gains and strain the balance of payments. To survive the upcoming fiscal year, analysts estimate Pakistan will need to secure roughly $21.2bn in external financing.
Despite a temporary price easing earlier this year, Pakistan is bracing for renewed inflationary pressures in FY27. Official projections from the IMF and the State Bank of Pakistan estimate average annual inflation will rise to 8.4–8.6pc, up from approximately 7.2pc in FY26. This upward trajectory is driven by a combination of external energy shocks and internal fiscal reforms.
Moreover, because fuel subsidies are gone under the $7 billion IMF Extended Fund Facility, domestic consumers will bear the direct weight of volatile international energy markets through mandatory fortnightly price adjustments. Much depends on how global crude prices fluctuate.
To mitigate intense social pressure and shield the most vulnerable from relentless inflationary shocks, the government has raised the current quarterly stipend under the Benazir Income Support Programme to Rs14,500 per family.
In doing so, policymakers have openly acknowledged that a massive segment of the population remains highly exposed to severe price volatility and a catastrophic decline in purchasing power. Looking ahead to the FY27 budget, the government has signalled intentions to expand this safety net further, aiming to increase the quarterly payout to Rs18,000 by January 2027.
However, even as fiscal planners prepare for this future bump, the core dilemma remains: is this increasing aid anywhere near enough?
When broken down, the upcoming, higher target of Rs18,000 per quarter still only translates to Rs6,000 a month — roughly Rs200 a day for an entire household. In an economic climate heavily impacted by soaring utility tariffs, persistent fuel hikes, and high food inflation, a daily budget of Rs200 cannot even secure a single, well-rounded meal for a family, let alone cover education, healthcare, or shelter.
While the promised transition to Rs18,000 prevents absolute starvation, it continues to function as temporary life support rather than a sustainable shield against poverty. Without dynamically indexing these cash transfers to the rapid pace of real-world inflation, the proposed budget increase risks offering little more than symbolic relief to the millions who rely on them.
Beyond traditional fiscal crises, climate change has emerged as a massive long-term threat to Pakistan’s economic stability. As one of the world’s most climate-vulnerable nations, Pakistan faces a relentless cycle of heatwaves, erratic monsoons, and glacial lake outburst floods.
These environmental shocks threaten agriculture where a single extreme weather season can cause widespread crop losses, crash rural incomes, drive food inflation, and force massive migration into already crowded urban centres.
To counter these threats and secure funding under the IMF’s Resilience and Sustainability Facility, Pakistan must now integrate climate-risk planning directly into federal and provincial budgets. This mandate requires the government to build disaster-risk financing mechanisms, reform broken water pricing systems, and introduce strict climate-adaptation requirements into major infrastructure planning.
Published in Dawn, The Business and Finance Weekly, June 1st, 2026