Pakistan is set to unveil its third federal budget under the IMF program next week at a time when the economy is showing signs of short-term stability, but continues to grapple with deep structural weaknesses that are weighing on growth, investment and employment.
Kamran Khan said in the latest episode of On My Radar that the past three years have largely been defined by repeated economic crises and stabilization efforts. While these measures have helped avert an immediate external default risk, they have also resulted in subdued GDP growth, weakening business activity, sluggish private investment and shrinking job opportunities across the country.
As a result, employment generation remains far below the needs of a rapidly growing young population, keeping unemployment pressures persistently high.
Over the past decade, Pakistan’s total public debt has surged from around PKR 19 trillion to nearly PKR 80 trillion, a rise that now dominates fiscal decision-making and severely limits policy space.
Today, close to 60% of federal revenue is consumed by debt servicing, meaning that nearly PKR 60 out of every PKR 100 earned by the state is spent on repaying past borrowings. This leaves limited room for development spending after defense allocations, transfers to provinces under the NFC Award, and public sector salaries.
Planning Minister Ahsan Iqbal recently noted that due to rising debt servicing costs, the federal Public Sector Development Program (PSDP) has remained largely stagnant at around PKR 1 trillion for the past eight years, even as provincial development spending has nearly tripled over the same period.
Meanwhile, investor sentiment remains under pressure. A recent Business Confidence Survey by the Overseas Investors Chamber of Commerce and Industry found that 70 to 80 percent of businesses are either delaying or reassessing investment decisions.
During the first ten months of the current fiscal year, foreign direct investment (FDI) fell by more than 44 percent, while the stock market also recorded notable foreign outflows, reflecting persistent uncertainty in the investment climate.
At the same time, Pakistan’s tax system continues to face a structural imbalance. Although tax collection has more than doubled over the past five years, the tax-to-GDP ratio remains stuck at around 10 percent—roughly half the regional average of 19 percent.
This raises a fundamental question: why is the tax base not expanding despite rising collections?
Analysts point to the continued reliance on the already taxed salaried class and compliant businesses, while a large informal sector remains outside the tax net.
Against this backdrop, the upcoming budget will be closely watched to see whether it simply focuses on raising additional revenue under IMF constraints, or whether it sets a credible path toward broadening the tax base and improving long-term economic competitiveness.
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