Pakistan prioritises defence with 20% budget hike amid economic challenges
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Pakistan has unveiled its federal budget for 2025-26, showing a stark shift in priorities with a significant 20% increase in defence spending, even as overall government expenditure sees a 7% cut.
The move comes in the wake of heightened tensions with India following the Pahalgam terror attack in April, which claimed 26 lives.
The new budget, presented by Prime Minister Shehbaz Sharif’s government, allocates 2.55 trillion Pakistani rupees ($9 billion) for defence – a rise from the previous year’s 2.12 trillion.
This figure does not include 742 billion rupees ($2.63 billion) earmarked for military pensions.
When combined, the total defence allocation stands at approximately 3.292 trillion rupees ($11.67 billion). Additionally, 704 billion rupees ($2.5 billion) have been assigned for equipment and other physical assets.
This defence-heavy allocation comes at a time when Pakistan’s overall debt has ballooned to nearly PKR 76,000 billion (roughly $270 billion) within the first nine months of the current fiscal year.
Despite these financial pressures, Finance Minister Muhammad Aurangzeb presented a PKR 17.573 trillion ($62 billion) budget, aiming to achieve 4.2% economic growth in the upcoming fiscal year. He claimed that Pakistan has stabilised its economy, which had been on the brink of default in 2023. “In short, our budget strategy is to change the economy's DNA by bringing basic changes,” Aurangzeb said.
Pakistan has also revised its fiscal deficit projection to 3.9% of GDP, down from the 5.9% target for 2024-25. Inflation is forecast at 7.5%, while the current fiscal year’s growth is expected to reach only 2.7%, falling short of the 3.6% target. In contrast, South Asia as a region grew by an average of 5.8% in 2024, with the Asian Development Bank expecting 6% growth in 2025.
In a related statement, Prime Minister Sharif asserted, “Pakistan needs to surpass India in the economic field.”
The budget comes after Islamabad secured $2.4 billion in financial aid from the International Monetary Fund (IMF) last month. The government has pledged to work closely with the IMF while preparing the FY26 budget, which is in line with the Fund’s reform demands. One such move is the planned privatisation of Pakistan International Airlines, as confirmed by Aurangzeb.
While the government anticipates growth will be supported by falling interest rates, economists caution that broader fiscal constraints and IMF-mandated reforms continue to hinder investment. Aurangzeb emphasised the budget's focus on boosting exports, increasing foreign currency reserves, and building a competitive economy to prevent the future balance of payments crises.
