- Tax reforms, energy fixes, and trade liberalisation can boost growth and investor confidence
- Efforts to expand tax net and control deficit could stabilise inflation and economy
Interview with Mr. Abdul Wasey Khan, an analyst
Profile:
Mr Abdul Wasey Khan is an Internal Auditor by profession and he has been working as Head of Department in some listed and well renowned companies for last 11 years. He is also former VP and Honorary Secretary of ICMA International.
PAGE: What impact could the Federal Budget 2025-26 have on the economy of Pakistan?
Abdul Wasey Khan: In my humble opinion, the following notable measures taken and their expected impact are important to note the impact of federal budget as a whole on the economy.
Measures Taken:
Deficit control: The budget cuts total spending by 7%, aiming to reduce the fiscal deficit to around 3.9–4.8% of GDP from last year’s 5.9%.
Growth aspirations: It targets a GDP growth rate of 4.2%, up from 2.7% in 2024–25—a significant jump if realized.
Broader tax base: The government plans to bring agriculture, real estate, retail, and the digital economy (e-commerce, freelancers) into the tax net.
Defense boost: A 20% increase in defense outlays (Rs 2.55 trn), partly due to regional tensions with India.
Development cuts: Public Sector Development Program (PSDP) allocation is stable at Rs 1 trn, with overall development spending reduced.
Energy and power reforms: Electricity tariff reductions, closure of inefficient plants, power sector privatization, and grid restructuring aim to reduce losses.
Trade liberalization: Tariff structure simplification and planned removal of non-tariff barriers over 4–5 years
Impact: However; achieving deficit control & GDP growth rate of 4.2%, depends heavily on revenue performance and structural reforms. Conservative deficit levels could stabilize inflation and the exchange rate, encouraging investment. If successful, Broader tax base can increase tax-to-GDP ratio (targeting 11%+ from 10%) and improve finances. Defense boost & Development cuts may though enhance security, however less public investment could squeeze infrastructure-driven growth potential, and social/welfare sector funding may lag behind. Energy and power reforms & Trade liberalization could improve energy-sector viability and boost export competitiveness. Effective implementation would enhance investor confidence and economic efficiency.
The 2025-26 budget pivots towards fiscal discipline, tax reforms, and structural modernization while accommodating security priorities. If the government successfully lifts tax compliance, maintains reforms, and keeps geopolitical strains in check, it could stabilize inflation, boost growth, and improve investor confidence. However, shortfalls in revenue, underinvestment in development, and external shocks pose genuine risks to achieving the 4.2% growth goal.
PAGE: Which sectors of the economy have been given preferences in the Budget?
Abdul Wasey Khan: The following sectors have been given preferences in the budget:
Defense spending is up 20%, with Rs 2.55 trn earmarked for the military, making it the single-largest allocation, equivalent to around 2.5% of GDP
Civil administration (bureaucracy) and pensions also saw significant increases to support defense structures. Transport and communications received a major boost: Rs 644 bn overall in PSDP, with Rs 332 bn for transport/communications, including a 27% increase in National Highways Authority funding (now Rs 229 bn) Key projects include N-25 Expressway, Karakoram Highway upgrades, Hyderabad-Sukkur Motorway, and new initiatives like the Diamer-Bhasha Dam. Energy received Rs 144 bn, covered under PSDP’s Rs 644 bn total, with some subsidy reductions freeing fiscal room. Water resource projects, including Diamer-Bhasha Dam, were prioritized as strategic assets. A dedicated Rs 4.2 bn in PSDP for agriculture uplift through crop diversification, cotton revival, livestock, and mechanization efforts. Agri-income tax, Green Pakistan Initiative, and no sales tax on fertilizers/pesticides indicate sector-level support.
PSDP sets aside Rs 150 bn for social development—covering Rs 63 bn+ for education and Rs 22 bn for health.
Higher education is a key priority: Rs 39.5 bn allocated, including scholarships and new campuses.
Allocations include Rs 53 bn for Science & IT, Rs 9 bn for governance, plus Rs 1.10 bn for the Board of Investment and Rs 2.78 bn for Climate Change (PSDP)
The budget clearly favors:
Defense & security (top priority),
Infrastructure—especially roads and transport,
Significant backing for social welfare, education, science/IT, and agriculture. However, the expansion in defense and reallocation toward political-majority-linked infrastructure have squeezed broader development spending—highlighting a focus on security and connectivity while maintaining cautious social investment.
PAGE: What is your standpoint about the taxation measures taken in the Budget?
Abdul Wasey Khan: My standpoint on the taxation measures in Pakistan’s Federal Budget 2025–26 is cautiously optimistic. Here’s a breakdown of the reasoning:
The inclusion of previously under-taxed sectors — agriculture, real estate, retail, and digital economy (freelancers, e-commerce)—is a long-overdue step, however taxing the agriculture elite or real estate tycoons has high political resistance.
Pakistan’s tax-to-GDP ratio (9–10%) is among the lowest in the region. Expanding the net is crucial for fiscal sustainability.
Mandatory digital payments and linking of databases (e.g. NADRA + FBR) show institutional intent to reduce leakages.
Relief for salaried individuals (revised tax slabs) and continued zero-rating on essential items (e.g. food/agriculture inputs) helps maintain purchasing power amid inflation fatigue.
Heavy reliance on sales tax and FED (excise duties) remains. These taxes disproportionately impact low- and middle-income consumers.
The petroleum levy and GST adjustments on fuel/utilities, even if necessary for revenue, will hit the average household.
Broadening the tax net is announced every year, but actual compliance stays low—less than 3 million active filers in a 240-million population.,
The taxation measures move in the right strategic direction with a focus on:
- Expanding the net
- Reducing evasion
- Protecting vulnerable groups
But they face executional fragility, especially in enforcement, political pushback, and taxpayer confidence. To succeed, the FBR and policymakers must shift from stopgap arrangements to institutional credibility, digital transparency, and equitable burden sharing.
PAGE: How do you see the investment scenario in the wake of the Budget?
Abdul Wasey Khan: It is interesting to note that the PSX surged to record highs—the KSE-100 breached 124 k as investors cheered the decision to keep equity-market taxes unchanged and redirect bank‐deposit withholding taxes toward equities. Prior to the budget, markets were cautious—dropping 700 points as uncertainty loomed around IMF-linked tax proposals; post-budget clarity triggered swift recovery. However, the following points are important to note builders warn that excessive real-estate taxes may push up to $30 bn offshore over five years.
The State Bank has paused further interest-rate cuts, holding policy rate at 11%, mindful of oil price volatility and inflation returning to 3.5% recently. Without lower rates or structural reforms, analysts believe interest easing alone won’t rekindle private-sector investment.
Reforms remain conditional and challenging — if tax-base broadening, subsidy rationalization, and capital controls are unevenly enforced, it could suppress investment.
Sustained inflows and FDI will hinge on transparent policy implementation, regulatory consistency, and infrastructure development.