Pakistan’s Budget 2025–26 Faces IMF Scrutiny Amid Development Spending Concerns

Pakistan’s fiscal planning for the 2025–26 budget has encountered significant challenges as the International Monetary Fund (IMF) raises objections to several proposed budget targets. Central to the IMF’s concerns is the escalating “throw-forward” of development projects, now exceeding Rs. 10 trillion, representing the cost of approved but incomplete schemes .

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IMF’s Key Objections

1. Unrealistic Revenue Projections: The government has set an ambitious Federal Board of Revenue (FBR) target exceeding RS. 12.5 trillion. However, the IMF has expressed scepticism, citing Pakistan’s historical underperformance in tax collection and the absence of a clear strategy to broaden the tax base .

2. Increased Defence Expenditures: A proposed 18% hike in defence spending, amounting to over RS. 2.5 trillion, has raised red flags. The IMF is concerned that such allocations could crowd out essential sectors like health and education, especially given the country’s constrained fiscal space .

3. Escalating Development Allocations: The Public Sector Development Programme (PSDP) is set to increase by 55%, which the IMF deems financially unsustainable. The Fund emphasizes that such expenditures should align with realistic revenue projections .

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Domestic Fiscal Coordination Challenges

The government’s internal coordination has also come under strain. The Ministry of Finance has proposed a RS. 921 billion ceiling for the PSDP for fiscal year 2025–26, significantly lower than the Planning Ministry’s demand of RS. 1.6 trillion . This disparity underscores the challenges in aligning fiscal priorities amid IMF negotiations.

Additionally, the Annual Plan Coordination Committee (APCC) meeting, initially scheduled for May 26 to finalize PSDP targets, has been postponed indefinitely . This delay reflects the ongoing uncertainties in budget finalization.

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Government’s Response and Next Steps

In light of the IMF’s objections, Prime Minister Shahbaz Sharif has directed the Ministry of Planning to provide detailed reports on 500 ongoing development projects, with a focus on infrastructure-related initiatives. Furthermore, the government has postponed the presentation of the federal budget to June 10, 2025, to allow for further deliberations and alignment with IMF recommendations .

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Broader Economic Implications

The IMF’s concerns highlight deeper macroeconomic challenges facing Pakistan, including:

• High Inflation: Persistently high inflation, which peaked at over 38% in early 2024, has eroded household purchasing power.

• Foreign Exchange Reserves: Reserves barely cover two months of imports, putting pressure on the Pakistani Rupee and delaying essential imports.

• Debt Servicing: A significant portion of government revenue is allocated to debt servicing, limiting fiscal space for development spending .

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Conclusion

Pakistan stands at a critical juncture where aligning fiscal policies with economic realities is imperative. The government’s engagement with the IMF and internal coordination among ministries will be crucial in formulating a sustainable and inclusive budget for the fiscal year 2025–26.