{"id":32957,"date":"2026-06-03T08:42:35","date_gmt":"2026-06-03T08:42:35","guid":{"rendered":"https:\/\/gsrra.com\/?p=32957"},"modified":"2026-06-03T08:42:39","modified_gmt":"2026-06-03T08:42:39","slug":"beyond-the-imf-baseline-pakistans-hard-fiscal-choices-in-fy27-budget","status":"publish","type":"post","link":"https:\/\/gsrra.com\/?p=32957","title":{"rendered":"Beyond the IMF baseline: Pakistan\u2019s hard fiscal choices in FY27 budget"},"content":{"rendered":"\n

<\/a>On April 27,\u00a0the State Bank of Pakistan (SBP) raised<\/a>\u00a0the policy rate by 100 basis points to 11.5%, its first hike since June 2023. On May 14, the International Monetary Fund (IMF) published Country Report 26\/101, projecting fiscal year 2026-27 (FY27) growth at 3.5%, average\u00a0inflation<\/a>\u00a0at 8.4%, a current account deficit of 0.9% of gross domestic product (GDP), gross reserves rising toward $21 billion, and an underlying primary surplus of 2% of GDP. The two documents are seventeen days apart, yet they seem to describe two different countries.<\/strong><\/p>\n\n\n\n

The gap exists because the IMF baseline was built before the Iran-US war had fully transmitted into Pakistan\u2019s inflation, import, and energy channels. The staff report acknowledges downside risk but does not quantify it. The SBP, sitting closer to the inflation prints and the import bill, broke with the baseline before the Fund could publish it. That gap is where the budget story begins.<\/p>\n\n\n\n

The Fund\u2019s projections rest on a chain of optimistic assumptions. The baseline expects inflation to decelerate by 4.5 percentage points in twelve months, fuel passthrough to remain contained, reserves to accumulate on inflows that have been weakening since April, the rupee<\/a> to absorb shocks without disorderly depreciation, and structural reforms to deliver at a pace they have not delivered at in any recent cycle. Each assumption is independently questionable. The corridor requires all of them to hold together. The published table reinforces the caution by leaving the six-month Treasury bill (T-bill) and real effective exchange rate (REER) paths blank for both FY26 and FY27.<\/p>\n\n\n\n

Also read: What does IMF want from Pakistan\u2019s upcoming budget?<\/a><\/strong><\/p>\n\n\n\n

Beyond that corridor, the ground realities are accumulating faster than the baseline can absorb. Hormuz traffic remains a fraction of pre-conflict volumes, and even with a sixty-day ceasefire extension under discussion, Pakistan\u2019s structural exposure runs well beyond any near-term reopening. The damage Iranian strikes did to Qatari LNG capacity will take<\/a> three to five years to repair, leaving Pakistan exposed for years given its near-total LNG reliance on Qatar and the UAE. The weekly oil import bill, which more than doubled at peak, may compress as the truce holds, but the premium baked into FY27 fuel-cost assumptions will not fully unwind.<\/p>\n\n\n\n

Retail prices have begun easing as crude softens, yet remain well above pre-conflict levels; the premium has settled into the new floor rather than reversed. With Diammonium phosphate (DAP) imports unplanned for Kharif and gas supply contested between fertiliser and power, the crop cycle itself becomes a fiscal variable. India has already raised its fertiliser subsidy for the season; Pakistan has neither the fiscal room to match it nor the political room to avoid replicating it if crops fail.<\/p>\n\n\n\n

The coming monsoon layers another risk onto the same fragile structure. Last year\u2019s floods displaced three million Pakistanis; this year\u2019s forecast carries similar exposure. April remittances<\/a> dropped 7.6% month-on-month to $3.54 billion. Foreign direct investment<\/a> (FDI) in the first ten months of FY26 fell 31% to $1.41 billion against $2.04 billion last year. The current account<\/a> turned negative in April, and the cumulative 10M FY26 balance has slipped into a $252 million deficit against a $1.66 billion surplus in the same period last year.<\/p>\n\n\n\n

Headline inflation jumped from 7.3% in March<\/a> to 10.89% in April<\/a>. The IMF\u2019s projection corridor, described in early March, was already narrower by late May. As the budget approaches, it is narrowing further.<\/p>\n\n\n\n

Underneath these shocks sits a more durable problem: the structure of taxation. The state extracts withholding taxes, sales tax, the petroleum levy, and electricity duties from consumers, depositors, salaried workers, and formal firms. That revenue is recycled into debt servicing. The bulk of domestic markup flows to holders of government securities, with commercial banks central to that structure.<\/p>\n\n\n\n

Bank earnings translate directly into share-price gains, and the KSE-100<\/a>, weighted heavily toward the banking sector, rises on the back of those gains. Policymakers point to the index as evidence of confidence.<\/p>\n\n\n\n

The result is recycled liquidity, funded by extraction from the same economy that needs investment. The state taxes deposit interest at 20%, money-market fund distributions at 25%, and the agricultural landowner at zero. A rising index can therefore coexist with weak exports, anaemic private credit, stagnant real wages, and falling formal investment. The market signal is real, but it is not the same as productive recovery.<\/p>\n\n\n\n

The federal numbers make this squeeze unavoidable. Of the roughly Rs18 trillion the federation will collect next year, around Rs15 trillion is the divisible pool, and 57.5% of that pool goes straight to the provinces. That leaves Islamabad with about Rs6.4 trillion plus another Rs3.5 trillion in non-tax revenue. Debt servicing then absorbs Rs8.2 trillion. Less than Rs2 trillion is left. Defense alone costs Rs2.56 trillion, while pensions, civil government, subsidies, Public Sector Development Programme (PSDP), Benazir Income Support Programme (BISP), and grants all require fresh borrowing.<\/p>\n\n\n\n

The NFC formula was last revised in 2010, when the total debt stock was Rs 10 trillion. The debt has grown nearly tenfold since, but the sharing formula has not changed. The issue is responsibility sharing rather than autonomy.<\/p>\n\n\n\n

Inside this architecture, the energy sector is where the war shock will translate into fiscal slippage. Power sector circular debt now sits at Rs1.84 trillion even after a\u00a0Rs1.225 trillion bank refinancing facility\u00a0absorbed part of the legacy stock, and combined energy sector circular debt, including gas, has reached Rs5.2 trillion by the IMF\u2019s own estimate. Capacity payments to independent power producers (IPPs) continue to absorb roughly Rs1.5 trillion every year. Any subsidy that returns to soften the pain of cost-aligned pricing breaks the primary surplus target the Fund has built its FY27 framework around.<\/p>\n\n\n\n

Dr Hafiz Pasha\u2019s recent analysis places FY27 growth at 2.5% against the Fund\u2019s 3.5%, inflation at 12% against 8.4%, the current account deficit at $10 billion against $4 billion, and reserves declining rather than building. That stress case matters because it changes the monetary policy equation. If inflation and reserves follow that path, the policy rate cannot fall; it moves deeper into crisis-management territory.<\/p>\n\n\n\n

Industry leaders continue to demand a much lower policy rate, somewhere in the 6% to 8% range, to revive investment and lift private credit growth from the 0.9% it has been crawling at. Their frustration is real, but Pakistan is trapped between two equations. The inflation and reserve arithmetic force the SBP to keep rates high to protect the rupee and meet IMF conditionality.<\/p>\n\n\n\n

The growth equation requires cheaper credit. The problem is that the structural conditions that would make a 6% to 8% rate sustainable have not been built. Getting there requires a different economy underneath: one where agriculture, retail, real estate, and services are genuinely taxed; one where banks lend to producers rather than the state; and one where pensions and civil service costs are reformed rather than financed through fresh borrowing every year.<\/p>\n\n\n\n

Four tests will measure the FY27 budget. Whether it shifts the tax burden away from deposits, dividends, utilities, and formal firms and onto real estate, agriculture, retail turnover, and undocumented services. Whether it protects productive PSDP while attacking pension rigidities, state-owned enterprises (SOE) losses, DISCO governance, and capacity payments. Whether it rewires banking so credit reaches the private sector through guarantees, collateral reform, and export-linked refinance. And whether it ties concessional credit to verified dollar generation rather than dispersing it as economy-wide stimulus.<\/p>\n\n\n\n

If the budget leans again on higher withholding rates, non-filer levies, another PSDP cut, and slab adjustments on the same salaried base, the documented economy will keep financing the same debt loop, and the rate will stay where inflation and reserves put it. If it touches the structural layer beneath by taxing the wealth that has stayed outside the net, repairing the energy sector instead of subsidising it, and giving banks a reason to lend to producers, the room for the rate to fall opens on its own.<\/p>\n\n\n\n

Pakistan has shown, repeatedly, that it can stabilise when forced to. The harder question is whether it can use one of these windows to rebuild the structure underneath, instead of waiting for the next crisis to force the same conversation again.<\/p>\n\n\n\n

Reference Link:- https:\/\/www.brecorder.com\/news\/40423484<\/a><\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

On April 27,\u00a0the State Bank of Pakistan (SBP) raised\u00a0the policy rate by 100 basis points to 11.5%, its first hike since June 2023. On May 14, the International Monetary Fund (IMF) published Country Report 26\/101, projecting fiscal year 2026-27 (FY27) growth at 3.5%, average\u00a0inflation\u00a0at 8.4%, a current account deficit of 0.9% of gross domestic product […]<\/p>\n","protected":false},"author":1,"featured_media":32958,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"aside","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[2],"tags":[29948,29949,2076,23734,29952,24016,29951,483,29953],"class_list":["post-32957","post","type-post","status-publish","format-aside","has-post-thumbnail","hentry","category-sample-category","tag-beyond-imf","tag-development-funds","tag-economy-2","tag-finance-2","tag-fiscal-hardships","tag-imf-2","tag-imf-baseline","tag-pakistan-2","tag-tax-burden","post_format-post-format-aside"],"jetpack_publicize_connections":[],"_links":{"self":[{"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/posts\/32957","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gsrra.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=32957"}],"version-history":[{"count":2,"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/posts\/32957\/revisions"}],"predecessor-version":[{"id":32960,"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/posts\/32957\/revisions\/32960"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/gsrra.com\/index.php?rest_route=\/wp\/v2\/media\/32958"}],"wp:attachment":[{"href":"https:\/\/gsrra.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=32957"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gsrra.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=32957"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gsrra.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=32957"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}