Pakistan will raise defence spending by a steep 20 per cent after a military clash with its old enemy India last month, but will slash overall federal expenditure for fiscal 2025-26 by a hefty 7pc to 17.57 trillion rupees ($62 billion).
The budget presented yesterday by Prime Minister Shehbaz Sharif’s government allocated 2.55trn rupees ($9bn) to defence in July-June 2025-26, up from 2.12trn.
It projected a deficit of 3.9% of GDP against the 5.9% targeted for 2024-25. Inflation was projected at 7.5pc and growth at 4.2pc.
The South Asian nation wants to kickstart growth while boosting its defences after the worst fighting with its neighbour in nearly three decades - which it has cast as a victory - and meeting the strictures of an International Monetary Fund finance programme.
“After defeating India in a conventional war, now we have to surpass it in the economic field,” Sharif said in a statement.
Pakistan must also contend with the uncertainty of new import tariffs being imposed by the United States, its biggest export market.
For the coming year, Pakistan’s government allocated 742bn Pakistani rupees ($2.63bn) to military pensions, taking the entire defence budget to 3.292trn Pakistani rupees ($11.67bn). That included 704bn Pakistani rupees ($2.5bn) in spending on equipment and other physical assets.
India’s defence spending in its 2025–26 (April-March) fiscal year was set at $78.7bn, up 9.5pc, including pensions and $21bn earmarked for equipment. It has indicated that it too will boost defence spending further.
Sharif’s government has projected 4.2pc economic growth in 2025-26, saying it has steadied the economy, which looked at risk of defaulting on its debts as recently as 2023. Growth this fiscal year is likely to be 2.7pc, against the budgeted target of 3.6pc.
Pakistan’s growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8pc and the Asian Development Bank expects 6.0pc in 2025.
Finance Minister Muhammad Aurangzeb said the government intended to complete the privatisation of Pakistan International Airlines, a request of the IMF.
Growth should be aided by a sharp drop in the cost of borrowing, the government says, after a succession of interest rate cuts. But economists warn that monetary policy alone may not be enough, with fiscal constraints and IMF-mandated reforms still weighing on investment.
Aurangzeb said that the budget was the start of a strategy to boost exports, increase foreign currency reserves to avoid the balance of payments crises of the past, and create a more competitive economy.
“In short, our budget strategy is to change the economy’s DNA by bringing basic changes,” he said.
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