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Pakistan’s tax-to-GDP is 9-10% vs 15% regional average

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Pakistan’s tax-to-GDP is 9-10% vs 15% regional average

Interview with Mr. Zafar Iqbal, Chairman & MD SAI Institute of Studies & SAI Co. (Pvt.) Ltd.

Profile:

Mr. Zafar Iqbal has been associated with the oil & gas industry and educational institutes for more than fifty years. He is also the Founder President of Defence Residents Society, Founder President of Small & Medium Enterprises Alliance, Founder President of Bazm-e-Kiran and President of Society for Promotion of Arabic. He has frequently travelled to more than 25 countries and attended many seminars.

PAKISTAN & GULF ECONOMIST approached Mr. Zafar Iqbal for his perspective on the Federal Budget 2026-27. Following is his perspective:

Role of the IMF in Pakistan 

IMF is Pakistan’s financial “disciplinarian + lender of last resort” right now.

Positives:
  1. Stability anchor: $7bn Extended Fund Facility EFF approved 2024 forced fiscal discipline.

Result: Fiscal deficit narrowed to 3.2% GDP in FY25, forex reserves >$18bn projected by June 2026, exchange rate more stable.

  1. Credibility: The IMF program unlocks money from the World Bank, ADB, and Gulf countries. Without EFF, Pakistan wouldn’t get the $21.2bn external financing needed for FY27.
  1. Reforms pressure: Pushed for energy sector reforms, SOE privatization, broader tax base. Energy losses of Rs400bn/year were unsustainable.
Negatives/Trade-offs:
  1. Austerity pain: No fuel subsidies + fortnightly or weekly price adjustments = consumers bear the full oil shock. April 2026 inflation hit 10.9% monthly due to the Middle East conflict + IMF conditions.
  1. Tax burden shift: IMF wants GST 18%→19% + Rs430bn new taxes for FY27. Hits the salaried class + low-income households hardest.
  1. Growth vs stability tension: Strict fiscal targets can slow growth. FY26 missed 4.2% target, did 3.7%, partly due to fiscal consolidation.

My standpoint: The IMF program is a necessary medicine, not a cure. It prevents default but doesn’t fix structural issues like low exports, energy theft, or population growth. Pakistan needs the IMF for the next 2-3 years, but must use that window to build exports + tax base, not just meet conditions.

FBR Revenue Target FY2026-27: Rs15.267 trillion is ambitious but doable with pain.

Perspective:

  1. Scale: Rs15.267 trillion is 10% higher than FY26. To hit it, govt plans Rs430bn new measures + GST hike 18%→19%.
  1. Reality check: Pakistan’s tax-to-GDP is 9-10% vs 15% regional average. So the gap is huge. FBR missed targets before due to a narrow base – only 2M filers for 258M people.
  1. FY27 plan: Heavy reliance on indirect taxes – petroleum levy, GST. Provincial govts must add Rs400bn via agri income tax + services GST.

My comment: Target is IMF-mandated, not fully organic. It’ll work short-term, but risks inflation + slowing consumption. Real fix = document the undocumented economy, tax retail/real estate/agri properly. Without that, FBR will keep chasing the same salaried + corporate taxpayers.

PSDP Allocation + Infrastructure

State PSDP = Public Sector Development Program – the government’s infrastructure budget.

Current state FY26:

  1. Public investment: Kept flat at 3% of GDP for FY27. Private investment targeted to rise 9.6%→10.3% GDP. So the government wants the private sector to lead.
  1. Infrastructure gaps: Energy losses Rs400bn/year, circular debt persists. Transport, water, and sanitation are still underfunded vs population growth.
  1. Focus areas: FY27 targets 4% growth via agriculture, LSM 4.5%, and ICT 7.7%. PSDP likely prioritizes energy, water, and CPEC-related projects.

My standpoint: 3% GDP public investment is low for a country with 3M+ population growth yearly, + climate vulnerability. PSDP needs to shift from “big projects” to maintenance + climate resilience. Roads/bridges destroyed by floods cost more in the long-term. World Bank CPF 2026-2035 is right to focus on water + climate.

Inflation, Population Growth, Interest Rate

Inflation:

FY26 avg 6.2%, but April 2026 spiked to 10.9% monthly due to the oil shock. FY27 target 8.2%, but SBP/IMF projects 8.4-8.6%.

Take: Inflation is Pakistan’s #1 vulnerability. Tied to oil + rupee + IMF taxes. Without export growth, every global oil spike becomes a domestic crisis. Core inflation remains sticky.

Population Growth:

1.59% yearly = 3M+ new people/year. Pakistan 258M now → 260M+ by end 2026. Fertility 3.6 children/woman, median age 20.6-22.5 years.

Take: This is the silent budget killer. 2M jobs target for FY27 vs 3M+ new people = deficit. A high youth ratio is a “demographic dividend” only if educated + skilled. Right now, 28% kids 5-16 are out of school. Population policy is as important as fiscal policy.

Interest Rate:

SBP kept rates high through FY25-26 to fight inflation. With inflation falling from the peak, the SBP is likely to cut gradually in FY27 if the IMF inflation target 8.2% holds.

Take: High interest rates help control inflation + attract remittances, but kill private investment. FY27 target 10.3% private investment/GDP is hard if rates stay high. Balancing act needed.

Overall: Pakistan’s FY27 plan assumes “stable external conditions”. That’s the weak link. IMF + FBR targets are short-term stabilizers. Long-term fix needs: 1) Export growth > remittances, 2) Population planning, 3) PSDP focused on climate + human capital.

Govt. must focus and induct austerity measures strictly and reduce large number of cabinet ministers, advisors, govt employees cut down life style luxuries, foreign travels and reduce rates of heavy taxes for already paying tax payers and find new tax payers and should spend money generated thru taxes on welfare of poor people.