Pakistan’s budget deficit to widen amid slower growth, S&P says

S&P Global Market Intelligence forecasts Pakistan’s overall budget deficit will reach 5.1% of GDP, higher than the government’s estimate of 3.9%. Real GDP growth is projected at 3.6% in fiscal 2026, below the official target of 4.2%.

Relief and targeted measures are expected to partially shield lower- to middle-income households and small businesses from cost-of-living pressures, particularly as inflation slows. Consumer price inflation is projected to ease to 3.9% in 2025 and 6.3% in 2026.

Meanwhile, the large-scale manufacturing sector is expected to see a broader recovery, with growth forecast at 5.7% in 2026.

Key Highlights from the Outlook:

• Fiscal Consolidation and IMF Program: The budget’s commitment to fiscal consolidation aligns with expectations, as the coalition government aims to maintain progress under its IMF program. This would enable access to concessional financing and bilateral repayment rollovers from traditional allies and multilateral institutions. The budget improves the likelihood of Pakistan staying on track with IMF requirements, ensuring timely disbursements.
• Revenue Challenges: Implementation of revenue-raising measures will be critical. While widespread civil opposition is unlikely, sporadic protests—particularly over the carbon tax on fuel—may occur in some cities. Historically, revenue targets have been missed, and shortfalls could lead to underutilized development spending, with higher priority given to current expenditures, including defense and interest payments.
• Defense Spending Pressures: Increased defense spending, expected after recent military tensions, will likely constrain budgets for education and health. The additional allocation is expected to fund military equipment, including fighter jets and missile defense systems, as personnel costs are not part of the defense budget.
• Inflation and Indirect Taxes: Heavy reliance on indirect taxation may sustain inflationary pressures, with businesses likely passing costs to consumers. Tax policies targeting wholesale and retail sectors could underperform due to undocumented economic activity, potentially widening the fiscal deficit beyond targets.