Pakistan Federal Budget FY26 Preview

ISLAMABAD: Fiscal consolidation to continue: Pakistan is set to announce Federal Budget FY26 on Jun 02, 2025. We expect this budget to continue fiscal consolidation, focus on IMF guidelines and bring untaxed/low tax areas in tax net.

Furthermore, we believe, this Budget FY26 hold high importance from policy point of view as various additional legislative engagements are likely to be undertaken i.e. inclusion of Section 114c, National Tariff Policy, Captive Power Levy Ordinance, removing cap on Debt Servicing Surcharge (DSS) amongst others.

Government’s commitment to IMF for FY26 Budget: Government has committed with IMF to continue with fiscal consolidation in FY26 budget to ensure debt sustainability.

Pakistan Market – Selected Budget Changes

 The government targets primary surplus of 1.6% of GDP (vs. 2.0-2.1% of GDP in FY25), a surplus for third consecutive year after 2 decades. The govt. has also committed to use any windfall dividend expected from central bank over and above 1% of GDP to retire debt.

FBR FY26 Tax revenue growth target could be lowest in 6 years: FBR revenue target is expected at Rs14.1-14.3tn, up 16-18% YoY, which will be a lowest % growth in last 6 years. FBR has achieved 5-year revenue CAGR of 25% from FY21-25.

We believe, out of this required 16-18% growth, ~12% would be achieved through autonomous growth driven by real GDP growth of 3.6% and inflation of 7.7%. The remaining 4-5% growth translates into additional tax measures of Rs500-600bn, we estimate.

Expected revenue measures: Few expected measures which are already announced by the Government are like (1) change in GST calculation price of sugar from Rs72.22 per kg to market price, this measure is expected to yield annual incremental revenue of Rs70-80bn, (2) likely introduction of tax on pension, (3) likely removal of exemptions on FATA/PATA, (4) likely tax on retailers and wholesalers, (5) likely increase in FED on cigarettes, (6) increase in FED on fertilizer products and pesticides by 500bps, (7) likely tax on income of freelancers/vloggers/youtubers and (7) Removal of remaining exemption or increase in sales tax on goods mentioned in Schedule 5, 6, and 8 i.e. Pharma, food amongst others.

Expected Relief Measures: Government is expected to announce some relief measures namely (1) extension in exemption limit on salary or reduction of tax rate by 2.5% for all salary brackets, (2) rationalization of duties on trade, (3) likely housing finance subsidy, (4) inflation adjustment in minimum salary and unconditional cash transfer, and (5) some rationalization in super tax.

Revenue measure taken by other countries in IMF programs are (1) Introduction of Gift tax, wealth transfer tax, and inheritance tax, (2) removal of sector specific exemptions and reduced corporate income tax rates, (3) imposing VAT on non residents E-commerce, (4) Streamlining VAT laws and removing VAT exemptions, (5) eliminating tax exemptions for SOEs, (6) environmental surcharge on multiple car ownerships, and (7) Increased tax on land registration and foreign travel among.

GDP growth target is likely at 3.5-4.5% for FY26: On economic indicators side, Govt. is reportedly, setting up GDP growth target of 3.5-4.5%. While we expect GDP growth target for FY26 at 3.5-4.0% led by services.

Impact on Stock Market: We believe budget is likely to be neutral for the market in short-term. However, in the medium term, market will take it positive considering stable economic roadmap which would be signaled by this budget. Nonethless, relationship with India will keep the market volatile until a complete/new peace agreement is signed.

Sector wise, we expect, Budget FY26 would likely be neutral to positive for cement, steel, oil & gas, consumers, and IPPs, while neutral for OMCs, IT, Banks, Pharma, Autos and Textile.

We mentioned in our Annual Strategy Report released on Nov 16, 2024, approval of budget in line with IMF guidelines would be a key catalyst for re-rating of market multiple to historic average. Currently market is trading at 2026E PE of 5.3x, 24% lower than historic forward PE of 7x.

 We maintain our base case Index Target of 127,000 for Dec 2025. However, with higher cash liquidity, index can cross 150,000 mark assuming successful IMF review in Sep 2025 and political/geo-political stability.