- Budget 2025-26 outlines growth targets, debt servicing pressure, and opportunities in Shariah-compliant investments
Perspective of Ms. Tara Uzra Dawood, CEO 786 Investments Limited
PAKISTAN & GULF ECONOMIST approached Ms. Tara Uzra Dawood, CEO 786 Investments Limited, for her perspective on the Federal Budget for 2025-26. Following are the excerpts:
Shariah asset management perspective:
The Federal Budget for Fiscal Year 2025-26, announced amid geopolitical tensions and economic challenges, outlines ambitious targets for growth and fiscal consolidation. From a Shariah-compliant asset management perspective, the budget presents both opportunities and concerns that merit careful consideration.
Shariah-compliant finance: Progress and challenges
The government’s launch of its inaugural Green Sukuk, aiming to raise between $71.4 million and $107.1 million for sustainable projects, is a commendable step towards integrating Islamic finance with environmental objectives. This initiative aligns with global best practices and offers Shariah-compliant investment avenues in renewable energy and climate-resilient infrastructure .
Islamic banking growth:
As of June 30, 2024, 56% of market capitalization at the Pakistan Stock Exchange comprises Shariah-compliant securities. In the collective investment segment, 48% of mutual fund assets, 66% of voluntary pension fund assets, and 95% of Real Estate Investment Trusts (REITs) are Shariah-compliant . This growth reflects a positive shift towards Islamic finance, though challenges remain in achieving the Federal Shariat Court’s directive to eliminate interest by 2027.
Regulatory developments:
The Securities and Exchange Commission of Pakistan (SECP) is advancing measures to enhance the Shariah-compliant investment sector, including the introduction of Tier I and II capital requirements for Islamic non-bank financial institutions and the establishment of an alternative dispute resolution mechanism by June 2026 . These initiatives aim to strengthen the sector’s resilience and compliance.
Fiscal measures and their implications:
Taxation policies:
The government’s efforts to broaden the tax base, including taxing agriculture, retail, and real estate sectors, are steps towards fiscal consolidation. However, the imposition of higher taxes on the salaried class and the elimination of sales tax exemptions may place additional burdens on taxpayers, potentially affecting disposable incomes and consumption patterns.
Defence spending:
A 20% increase in defence spending, totaling $9 billion, has been allocated in response to regional security concerns. While national security is paramount, the prioritization of defence over sectors like education, healthcare, and climate resilience raises concerns about the allocation of resources and its long-term impact on human capital development .
Fiscal deficit and debt servicing:
The projected fiscal deficit of 3.9% of GDP and the allocation of Rs 9.8 trillion for debt servicing underscore the challenges of managing public finances. With limited fiscal space, the government’s ability to invest in development and social sectors may be constrained, potentially affecting economic growth and social welfare.
Opportunities for Shariah-compliant investments:
Sovereign wealth fund: The establishment of the Pakistan Sovereign Wealth Fund (PSWF) presents an opportunity to channel investments into profitable state-owned enterprises. However, concerns have been raised about the potential loss of government control over these assets, as highlighted by the International Monetary Fund (IMF).
Islamic capital market growth: The progressive shift towards Shariah-compliant investments, with approximately 70% of stocks in the Karachi Stock Exchange KSE-100 Index already Shariah-compliant, indicates a growing market for Islamic financial products. This trend is further supported by the increasing penetration of digital financial platforms, which can facilitate retail investments .
Recommendations:
Enhanced Regulatory Support: The SECP should expedite the implementation of the proposed regulatory measures to bolster the Shariah-compliant investment sector’s infrastructure and investor confidence.
Balanced Fiscal Policies: While addressing security concerns is crucial, a balanced approach that also prioritizes investment in education, healthcare, and climate resilience is essential for sustainable development.
Transparency in sovereign wealth fund operations: Clear guidelines and oversight mechanisms should be established to ensure that the PSWF operates in a manner that aligns with national interests and maintains public trust.
Promotion of Islamic Finance Education: Initiatives to educate the public and financial professionals about the benefits and opportunities in Shariah-compliant investments can drive greater participation and market growth.
Conclusion:
The Federal Budget 2025-26 presents a mixed landscape for Shariah-compliant asset management in Pakistan. While there are commendable strides towards integrating Islamic finance principles, challenges related to fiscal policies, defence spending priorities, and regulatory frameworks need to be addressed to foster a conducive environment for sustainable and inclusive economic growth.