- By prioritising digital transformation, export-led growth, and climate resilience, Pakistan is poised to strengthen
The federal budget for the fiscal year 2025-26 marks a pivotal moment for Pakistan’s economy as it navigates a path toward stabilization and sustainable growth roadmap. With a total outlay of approximately 17.64 trillion PKR (equivalent to $63 billion at 280 PKR/USD), the budget reflects a delicate balance between fiscal discipline, structural reforms, and social welfare initiatives, underpinned by a 1.96 trillion PKR Extended Fund Facility (EFF) from the International Monetary Fund (IMF).
Macroeconomic Context and Budget Objectives
Pakistan’s economy has shown signs of stabilization in recent years, with inflation dropping to 4.1% by January 2025, foreign exchange reserves climbing to 3.92 trillion PKR ($14 billion), and a current account surplus of 526.4 billion PKR ($1.88 billion) for the first 10 months of FY25. These improvements stem from tight macroeconomic policies, exchange rate stabilization, and structural reforms initiated under the IMF’s EFF program. However, challenges such as high public debt (approaching 80% of GDP), persistent fiscal deficits, and structural inefficiencies in key sectors continue to constrain growth. The budget sets a GDP growth target of 4.2% for FY26, up from 2.7% in FY25, and aims to reduce the fiscal deficit to 3.9% of GDP, signaling a commitment to fiscal consolidation.
The budget emphasizes digital transformation, tax base expansion, and private sector-led growth, aligning with the “Uraan Pakistan” economic transformation plan, which targets 6% export-led GDP growth by 2028. Key measures include the elimination of the “non-filer” category, digital tax enforcement through AI audits, and increased funding for social welfare programs like the Benazir Income Support Program (BISP). Additionally, climate-focused initiatives, such as a carbon tax and green Sukuk, underscore Pakistan’s commitment to sustainable development. However, geopolitical risks, implementation gaps, and potential public resistance to tax reforms pose challenges to achieving these goals.
Banking Sector
The banking sector, a cornerstone of Pakistan’s financial system, stands to benefit from the budget’s focus on macroeconomic stability and digital transformation. The budget introduces measures to enhance financial inclusion, streamline regulations, and boost private sector credit. The State Bank of Pakistan (SBP) has lowered its policy rate to 12% by January 2025, reflecting declining inflation and improved liquidity. This monetary easing is expected to stimulate lending, with private sector credit projected to grow by 10% in FY26, supporting businesses and consumers.
Key Budget Measures
- Tax Reforms: The budget increases the tax on interest income from 15% to 20% for individuals with annual interest earnings above a certain threshold, exempting small savers. This aims to boost revenue but may discourage high-net-worth individuals from holding large deposits, potentially impacting bank liquidity.
- Digital Integration: The introduction of AI-based audit systems and e-billing for business transactions enhances transparency in banking operations. The SBP’s collaboration with the Federal Board of Revenue (FBR) to integrate financial transactions into the tax system will improve compliance but may increase operational costs for banks.
- Foreign Exchange Regulations: The budget maintains restrictions on foreign currency outflows, with banks required to report and justify transactions. While this supports reserve accumulation, it may deter foreign investors and complicate profit repatriation for multinational banks.
- Women-Inclusive Finance: The Asian Development Bank’s 98 billion PKR loan ($350 million) for women’s entrepreneurship, supported by the budget, will channel funds through banks to provide credit facilities for women-led businesses, fostering financial inclusion.
The reduction in interest rates and increased credit availability are positive for banks, as they encourage loan growth and improve asset quality. The focus on digital integration aligns with global trends, positioning banks to leverage technologies like blockchain and fintech for efficiency. However, higher taxes on interest income and stringent foreign exchange regulations may reduce deposit growth and foreign investment in the sector. Additionally, the budget’s push for public sector reforms, including privatization, could reduce government borrowing, freeing up capital for private sector lending. This shift is expected to benefit banks like Meezan Bank, MCB Bank, and Habib Bank, which are well-positioned to capitalize on increased private sector activity. The banking sector faces challenges from potential public resistance to digital tax enforcement, which could lead to reduced transaction volumes. Moreover, the budget’s emphasis on fiscal discipline may limit government spending, indirectly affecting banks’ public sector lending portfolios. On the opportunity side, the growth in remittances (projected to reach 10.64 trillion PKR in FY26) and the Roshan Digital Account’s 2.52 trillion PKR inflows provide banks with a stable source of foreign exchange, enhancing their capacity to finance trade and investment.
Mutual Funds
Mutual funds, a critical component of Pakistan’s investment landscape, are significantly impacted by the budget’s tax reforms and macroeconomic policies. The budget increases the tax on fixed-income mutual funds from 15% to 25%, aiming to align taxation with other investment vehicles. This change, combined with the PSX’s robust performance, has implications for investor behavior and fund management strategies.
- Taxation on Fixed-Income Funds: The increased tax rate on fixed-income mutual funds may deter risk-averse investors, pushing them toward equity-based funds or alternative investments like real estate.
- Capital Gains Tax: The budget fixes the capital gains tax at 15% for future purchases, providing clarity for investors and fund managers. This stability is expected to encourage long-term investments in mutual funds.
- Digital Financial Inclusion: The budget’s focus on digital platforms, such as the Roshan Digital Account, supports mutual funds by attracting overseas Pakistani investments into capital markets.
Stocks Rally
The PSX’s 60% year-to-date gain in 2024, driven by low valuations and domestic liquidity, creates a favorable environment for equity mutual funds.
The higher tax on fixed-income funds may lead to a shift in investor preference toward equity funds, particularly those tied to the PSX’s KSE-100 Index, which is projected to reach 165,215 points by December 2025. Fund managers will need to recalibrate portfolios to focus on high-performing sectors like fertilizers, banking, and oil and gas, which are expected to drive market gains. The budget’s macroeconomic stability measures, including a 2% primary surplus and lower inflation, enhance investor confidence, supporting inflows into mutual funds. However, the increased tax burden may reduce returns for conservative investors, potentially slowing the growth of fixed-income funds. The primary challenge for mutual funds is the potential outflow of capital due to higher taxes, particularly for retail investors. Fund managers must innovate by offering tax-efficient products or hybrid funds that balance equity and fixed-income exposure. On the opportunity side, the budget’s support for digital financial platforms and the PSX’s bullish outlook provide a fertile ground for mutual funds to attract both domestic and diaspora investments. The growth in remittances and FDI (up 20% in FY25) further strengthens the investment pool available to mutual funds.
The PSX has emerged as a bright spot in Pakistan’s economy, with the KSE-100 Index surging 60% year-to-date in 2024 and gaining 22.7% following the IMF’s 280 billion PKR ($1 billion) tranche approval in September 2024. The budget’s focus on macroeconomic stability, tax reforms, and sectoral incentives has significant implications for the stock market.
Key Budget Measures
- Primary Surplus Target: The budget’s 2% primary surplus target signals macroeconomic stability, a key driver of the PSX’s re-rating. Analysts expect the price-to-earnings (P/E) ratio to rise from 4.6x to 5.75x by December 2025, reflecting increased investor confidence.
- Tax Reforms: The fixed 15% capital gains tax and reduced withholding tax on property purchases (from 4% to 2.5%) stimulate investment in equities and real estate, indirectly boosting PSX-listed companies in construction and cement.
- Sectoral Incentives: The budget’s focus on agriculture, IT, and energy supports listed companies in these sectors, such as Fauji Fertiliser, Systems Limited, and Pakistan State Oil.
- Digital Integration: The launch of digital production tracking for industries like cement, fertilizers, and textiles enhances transparency, benefiting PSX-listed firms.
The PSX’s rally is driven by low valuations, domestic liquidity, and IMF-backed reforms, with mutual funds absorbing 10.98 billion PKR ($39.2 million) in net purchases in a single week in May 2025. Sectors like refineries (up 27.5%), fertilizers, and banking have led the market, with top performers including Agritech Limited (33.7%) and Attock Refinery Limited (27.1%). The budget’s tax relief for the salaried class and increased BISP funding are expected to boost consumption, benefiting consumer goods and retail companies listed on the PSX. However, higher taxes on interest income and pensions may divert some capital away from fixed-income securities toward equities, further fueling the market. The PSX faces risks from geopolitical tensions, such as potential trade disruptions due to U.S. tariffs (29% on Pakistani exports) and regional instability. Implementation gaps in public sector reforms could also undermine investor confidence. However, opportunities abound, with the Reko Diq mining project (21 trillion PKR, $75 billion) and foreign investments from companies like Aramco and Samsung signaling long-term growth potential. The budget’s focus on export-led growth under Uraan Pakistan positions the PSX as a key platform for capital formation, particularly in agriculture, IT, and energy.
Fertilizer Sector
The fertilizer sector, a critical component of Pakistan’s agriculture-driven economy, benefits from the budget’s emphasis on agricultural development. Agriculture contributes approximately 24% to GDP and employs 37.4% of the labor force, making the sector’s performance vital for economic growth.
Key Budget Measures
- Agricultural Loans: The budget reports a 15.7% increase in agricultural loans, from 1,785 billion PKR to 2,066 billion PKR in the first 10 months of FY25, supporting fertilizer companies by enhancing farmers’ purchasing power.
- Digital Tracking: The extension of digital production tracking to the fertilizer sector ensures transparency in supply chains, reducing tax evasion and improving efficiency.
- Export Support: The budget’s focus on export-led growth under Uraan Pakistan supports fertilizer companies like Fauji Fertiliser, which benefit from increased domestic and international demand.
- Taxation: The elimination of certain federal excise duties and reduced withholding taxes indirectly benefits fertilizer companies by lowering input costs.
The increase in agricultural loans and digital tracking enhances the fertilizer sector’s operational efficiency and market reach. Companies like Fauji Fertiliser and Engro Holdings are well-positioned to capitalize on robust corporate earnings, as noted by AKD Research. The sector’s performance on the PSX, with companies like Agritech Limited gaining 33.7% in a single week, reflects strong investor confidence. However, the imposition of an 18% sales tax on inputs like pesticides could increase production costs, potentially squeezing margins unless offset by higher subsidies or export revenues. The fertilizer sector faces challenges from volatile global commodity prices, which could impact raw material costs, and potential water shortages due to geopolitical issues, such as Indian water aggression. On the opportunity side, the budget’s agricultural focus, coupled with a record 1,260 billion PKR ($4.5 billion) of rice exports in FY19, suggests strong demand for fertilizers. The sector’s integration into digital tax systems also positions it for long-term efficiency gains, supporting Pakistan’s goal of becoming a net food exporter.
Remittances
Remittances are a lifeline for Pakistan’s economy, projected to reach 10.64 trillion PKR ($38 billion) by the end of FY26, a 31% increase from 8,736 billion PKR ($31.2 billion) in the first 10 months of FY25. The budget introduces measures to incentivize remittances and enhance their economic impact.
Key Budget Measures
- Incentives for Remitters: The budget announces civil awards for the top 15 remitters annually, encouraging overseas Pakistanis to send funds through formal channels.
- Roshan Digital Account: The account has attracted over 2.52 trillion PKR ($9 billion) in inflows, providing a stable source of foreign exchange and supporting the current account surplus.
- Tax Reforms: The budget’s digital integration ensures better tracking of remittance flows, reducing informal transactions and boosting transparency.
- Women-Inclusive Finance: Increased funding for women’s entrepreneurship indirectly supports remittance-dependent households by creating economic opportunities.
The budget’s incentives and digital platforms strengthen Pakistan’s remittance ecosystem, with inflows supporting consumption, investment, and foreign exchange reserves. The current account surplus of 526.4 billion PKR ($1.88 billion) in FY25, driven by remittances and exports, underscores their macroeconomic importance. Banks and financial institutions handling remittance flows, such as Habib Bank and MCB Bank, benefit from increased transaction volumes and liquidity. However, global economic slowdowns or changes in migration patterns could pose risks to remittance growth. The primary challenge is ensuring that remittance inflows remain robust amid global uncertainties, such as U.S. tariffs and commodity price volatility. The budget’s focus on diaspora engagement, including scholarships for children of overseas Pakistanis, creates a positive feedback loop, encouraging further remittances. The integration of remittances into the digital economy also enhances their traceability, supporting fiscal discipline and economic stability.
Oil Marketing Companies
OMCs and refineries play a critical role in Pakistan’s energy sector, with a total production of 2,984.8 billion PKR ($10.66 billion) in FY21. The budget introduces measures that impact their profitability and operational efficiency, with mixed implications.
Key Budget Measures
- Carbon Tax: A carbon tax of 2.5 PKR per liter on petrol, diesel, and furnace oil, rising to 5 PKR per liter in FY27, increases costs for OMCs and refineries.
- Customs Duty: The elimination of customs duty on diesel to 0% may reduce profitability for refineries, as it encourages cheaper imports, potentially undermining the refinery policy.
- Digital Tracking: The extension of digital production tracking to the petroleum sector enhances transparency but increases compliance costs.
- Petroleum Sector Reforms: The formation of a special committee to push forward reforms in the petroleum sector aims to improve efficiency and attract investment.
The carbon tax and increased compliance costs pose challenges for OMCs and refineries, particularly for companies like Pakistan State Oil and Attock Refinery Limited. The sector’s strong performance on the PSX, with refineries gaining 27.5% in a single week, reflects investor optimism, but higher taxes could erode margins. The budget’s focus on macroeconomic stability and monetary easing supports demand for petroleum products, as lower interest rates boost industrial activity. However, the zero customs duty on diesel may lead to increased competition from imports, impacting domestic refineries’ market share. The primary challenge is balancing environmental goals with profitability, as the carbon tax and import policies strain margins. Geopolitical risks, such as global oil price volatility, further complicate the outlook. On the opportunity side, the budget’s petroleum sector reforms and the Reko Diq project’s energy demands create potential for growth. Companies like Pakistan State Oil, with improved cash flows, are well-positioned to benefit from increased domestic demand and export opportunities.
Power Sector
The power sector, plagued by circular debt and inefficiencies, is a focal point of the budget’s reform agenda. The sector’s financial unsustainability has long constrained Pakistan’s economic growth, and the budget aims to address these challenges through structural reforms and climate-focused initiatives.
Key Budget Measures
- Energy Sector Reforms: The budget supports the reduction of circular debt through improved tariff structures and privatization of distribution companies.
- Carbon Tax and Green Sukuk: The carbon tax and issuance of green sukuk fund renewable energy projects, aligning with Pakistan’s goal of achieving net-zero emissions by 2070.
- Tax on Solar Panels: An 18% sales tax on solar panel imports aims to promote local manufacturing but may hinder renewable energy adoption in the short term.
- IMF Support: The IMF’s 392 billion PKR ($1.4 billion) Resilience and Sustainability Facility supports energy sector reforms, focusing on viability and efficiency.
The budget’s reforms aim to address the power sector’s circular debt, which has historically crowded out private investment. The carbon tax and green sukuk signal a shift toward renewable energy, benefiting companies investing in solar, wind, and hydropower. However, the 18% sales tax on solar panels may increase costs for consumers and delay renewable energy projects, particularly in rural areas. The privatization of distribution companies, if implemented effectively, could improve efficiency and reduce losses, but historical delays in public sector reforms pose risks. The power sector faces significant challenges, including public resistance to tariff hikes and delays in privatization. The high cost of imported fuels, exacerbated by global price volatility, continues to strain the sector. However, the budget’s focus on renewable energy and IMF-backed reforms creates opportunities for long-term growth. Companies investing in green energy, supported by green sukuk, could benefit from global demand for sustainable investments. The sector’s integration into digital tax systems also enhances transparency, potentially attracting foreign investors.
Broader Economic Implications
The budget’s focus on fiscal discipline, digital transformation, and sectoral reforms has far-reaching implications for Pakistan’s economy. The 4.2% GDP growth target for FY26 is ambitious but achievable, driven by recovering private consumption, increased remittances, and robust PSX performance. The reduction in the fiscal deficit to 3.9% and the primary surplus of 2% signal macroeconomic stability, attracting foreign investment from companies like Aramco and Samsung. However, challenges such as geopolitical risks, implementation gaps, and public resistance to tax reforms could undermine these gains.
- Global Confidence: Positive ratings from the IMF, Fitch, and Moody’s, combined with a 93% drop in default risk, position Pakistan as an attractive investment destination.
- Digital Economy: The budget’s digital tax reforms and IT sector growth (28% year-on-year) position Pakistan as a regional tech hub.
- Climate Leadership: Green initiatives like the carbon tax and green sukuk enhance Pakistan’s global environmental standing, attracting climate-focused investments.
- Reko Diq Project: The 21 trillion PKR ($75 billion) mining project could transform Balochistan’s economy, creating jobs and boosting related sectors like energy and construction.
Threats
- Geopolitical Risks: U.S. tariffs (29% on Pakistani exports) and Indian water aggression could disrupt trade and agricultural productivity.
- Implementation Gaps: Historical delays in public sector reforms and PSDP execution may undermine budget goals.
- Public Resistance: Pension reforms, fuel taxes, and privatization efforts may spark protests, challenging political stability.
- External Shocks: Global commodity price volatility could exacerbate inflation and fiscal pressures, impacting sectors like OMCs and refineries.
Last Words
The Pakistan Budget 2025-26 is a strategic roadmap for economic stabilization and growth, balancing fiscal discipline with social welfare and sectoral reforms. The banking sector benefits from monetary easing and digital integration, though higher taxes on interest income pose challenges. Mutual funds face shifts in investor preferences due to tax changes but are buoyed by the PSX’s bullish outlook. The PSX itself is a standout performer, driven by macroeconomic stability and sectoral incentives, with fertilizers, banking, and oil and gas leading the charge. The fertilizer sector gains from agricultural support, while remittances bolster the current account and financial inclusion. OMCs and refineries face cost pressures from the carbon tax but benefit from demand growth, and the power sector’s reforms signal a shift toward sustainability despite short-term hurdles.
The budget’s success hinges on effective implementation, political will, and resilience against external shocks. By prioritizing digital transformation, export-led growth, and climate resilience, Pakistan is poised to strengthen its economic foundation and attract global investment. However, addressing geopolitical risks, public resistance, and structural inefficiencies will be critical to sustaining this momentum. As Pakistan embarks on its Uraan Pakistan vision, the budget sets the stage for a transformative journey towards inclusive and sustainable growth, with sectors like banking, mutual funds, and the PSX playing pivotal roles in shaping the nation’s economic future.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at nazir_shaikh86@hotmail.com