Guns Over Growth? Pak Hikes Defence Budget By 20%, Slashes Overall Spending

Pakistan, whose overall debt has increased to nearly PKR 76,000 billion (approx USD 270 billion) in the first nine months of the current fiscal year, seems to be prioritising its military spending over development in the aftermath of a military clash with India last month. The budget presented on Tuesday by Prime Minister Shehbaz Sharif's government saw a whopping 20 per cent hike in defence spending, but the overall expenditure has been slashed by 7 per cent.

Pakistan Finance Minister Muhammad Aurangzeb hoped his ambitious PKR 17.573 trillion ($62 billion) proposal would drive economic growth by 4.2 per cent in the coming fiscal year, saying Islamabad has steadied the economy, which looked at risk of defaulting on its debts as recently as 2023. Pakistan also projected a deficit of 3.9 per cent of GDP (gross domestic product) against the 5.9 per cent targeted for 2024-25. Inflation was projected at 7.5 per cent and growth at 4.2 per cent. 

But, the growth this fiscal year is likely to be 2.7 per cent, against the budgeted target of 3.6 per cent, according to news agency Reuters. Pakistan's growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8 per cent, and the Asian Development Bank expects 6.0 per cent in 2025.

Defence Spending

The new budget allocated 2.55 trillion rupees ($9 billion) to defence in July-June 2025-26, up from 2.12 trillion. This excludes 742 billion Pakistani rupees ($2.63 billion) allocated to military pensions, taking the entire defence budget to 3.292 trillion Pakistani rupees ($11.67 billion). The budget also includes 704 billion Pakistani rupees ($2.5 billion) in spending on equipment and other physical assets.

Prime Minister Sharif, in a statement, said Pakistan need to surpass India "in the economic field."

The clashes with India were sparked in April after the terrorist attack in Jammu and Kashmir's Pahalgam killed 26 people. India has blamed Pakistan for backing terrorists who carried out the attack. 

Toeing To IMF Terms 

Islamabad last month received $2.4bn in financial aid from the International Monetary Fund (IMF). Islamabad has said that it was committed to preparing the FY26 budget "in close consultation with the Fund."

Finance Minister Muhammad Aurangzeb said the government intended to complete the privatisation of Pakistan International Airlines, a request of the IMF.

Growth should be aided by a sharp drop in the cost of borrowing, the government says, after a succession of interest rate cuts.

But economists warn that monetary policy alone may not be enough, with fiscal constraints and IMF-mandated reforms still weighing on investment.

Aurangzeb said that the budget was the start of a strategy to boost exports, increase foreign currency reserves to avoid the balance of payments crises of the past, and create a more competitive economy. "In short, our budget strategy is to change the economy's DNA by bringing basic changes," he said.