Pakistan’s economy hit by global shocks, budget will face tough choices: Dr Hafiz Pasha

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. Against this backdrop, senior economist and former federal finance minister Dr Hafiz Ahmed Pasha shared a candid assessment of the economy and the road ahead during an appearance on HUM News morning show Subh Say Aagay, 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%, which in turn pushed up transport costs and widened inflationary pressures across sectors. As a result, inflation reached 11.7% year-on-year in May 2026, well above the State Bank of Pakistan’s target range of 5% to 7%.

“The increase in fuel prices has had a cascading effect on the entire economy,” Dr Pasha observed, saying that food and transport costs have been particularly affected.

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.

“The government should reconsider the petroleum levy in view of rising poverty and inflation,” he said, adding that fuel taxation remains a major driver of price pressures.

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. “We have to conserve as much water as possible because further uncertainties cannot be ruled out,” he said.

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. He said the deficit has narrowed from 6–8pc in earlier years to a target of 3.5% this year, marking a 21-year low.

He also pointed to improvements in tax collection, noting that Pakistan’s tax-to-GDP ratio has risen to between 10pc and 12pc, with the Federal Board of Revenue (FBR) showing stronger performance in FY2024–25, particularly in income tax collection.

However, he cautioned that the system remains heavily dependent on indirect taxation, which accounts for roughly 60pc of total revenue.

“Our tax structure is still tilted towards indirect taxes, which places a heavier burden on consumers,” he said, adding that income tax should gradually become the dominant source of revenue.

Expanding the tax net and growth challenges

Dr Pasha called for broadening the tax base by bringing key sectors into the formal net, including traders, property owners, and large agricultural landlords, who he said currently face relatively low taxation.

He also cautioned that the Federal Board of Revenue’s Rs15 trillion revenue target for the current fiscal year may be difficult to achieve, as revenue performance is closely linked to broader economic growth and global conditions.

“Revenue growth depends significantly on global economic developments, and this must be taken into account when engaging with the IMF,” he said.

Despite the 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.