ISLAMABAD: With Pakistan preparing for yet another budget amid rising global uncertainty and domestic inflationary pressures, economists are warning that external shocks and structural weaknesses are once again set to shape the country’s fiscal space. Senior economist and former federal finance minister Dr Hafiz Ahmed Pasha shared a candid assessment of the economy and the road ahead, focusing on the challenges likely to define the budget 2026–27.
External Shocks Feeding Inflation
Dr Pasha said recent geopolitical tensions, particularly the US-Iran conflict and disruptions linked to the Strait of Hormuz, have had a significant impact on global energy markets, with direct consequences for Pakistan’s economy. He argued that rising international oil prices and supply uncertainties have fed into domestic inflation and economic stress. He noted that the government responded to the fuel crisis with a steep increase in petroleum prices of around 40 percent, which in turn pushed up transport costs and widened inflationary pressures across sectors. As a result, inflation reached 11.7 percent year-on-year in May 2026, well above the State Bank of Pakistan’s target range of 5 to 7 percent.
Budget Priorities and Relief Measures
Looking ahead to the upcoming budget, Dr Pasha said policymakers face a difficult balancing act between IMF commitments and providing relief to the public. He stressed that targeted measures would be essential to ease pressure on vulnerable households. One of his key recommendations was reducing the petroleum levy, which currently stands at Rs102.17 per litre on petrol and Rs58 per litre on high-speed diesel. He argued that the high levy has significantly added to the cost of living, particularly for low-income groups.
He also highlighted the need to strengthen poverty alleviation programmes such as the Benazir Income Support Programme (BISP), noting that the IMF has suggested increasing quarterly assistance from Rs14,500 to Rs20,000 to better cushion the impact of inflation on the poorest households.
Development Spending and Water Security Concerns
Dr Pasha’s third major recommendation focused on increasing development expenditure, especially in the water sector. He linked this priority to regional concerns, including India’s suspension of the Indus Waters Treaty. He warned that Pakistan must invest in water conservation and storage capacity to safeguard against potential future disruptions.
Fiscal Consolidation and Tax Structure
On fiscal performance, Dr Pasha acknowledged that Pakistan has made notable progress in reducing its budget deficit over the past five to six years, targeting 3.5 percent this year. However, he cautioned that the tax system remains heavily dependent on indirect taxation, which accounts for roughly 60 percent of total revenue. He called for broadening the tax base by bringing key sectors into the formal net, including traders, property owners, and large agricultural landlords. Despite challenges, Dr Pasha maintained a cautiously optimistic outlook, suggesting that with structural reforms and prudent fiscal management, Pakistan could stabilise its economic trajectory in the coming fiscal year
