Pakistan raises defense spending by 20% but cuts overall budget in 2025-26
PHOTO CAPTION: Illustrative photo — A Pakistani sniper team is seen in North Waziristan, Pakistan October 18, 2017. REUTERS/Caren Firouz
By Ariba Shahid, Saeed Shah and Asif Shahzad
ISLAMABAD - Pakistan announced its federal budget for fiscal year 2025-26 on Tuesday, shrinking overall spending by 7% to 17.57 trillion rupees ($62 billion) but raising defence expenditure by a steep 20% following a deadly conflict with old enemy India last month.
The government of Prime Minister Shehbaz Sharif presented a budget that allocated 2.55 trillion rupees ($9 billion) for defence spending in FY26, compared to 2.12 trillion in the fiscal year ending this month.
It projected a fiscal deficit of 3.9% against a targeted 5.9% deficit in 2024-25. Inflation was projected at 7.5% and growth at 4.2%.
The South Asian nation is seeking to kickstart growth while finding resources for the sharp hike in defence expenditure in the aftermath of the worst fighting with old foe India in nearly three decades.
It also has to manage remaining within the discipline of its International Monetary Fund (IMF) programme and the uncertainty from new trade tariffs being imposed by the United States, its biggest export market.
Economists were expecting an increase of around 20% in the defence budget, likely offset by cuts in development spending.
The military clash between nuclear-armed India and Pakistan was sparked by an April attack by Islamist assailants who targeted Hindu tourists in Indian Kashmir, killing 26 men.
New Delhi blamed the attack on militants backed by Pakistan, a charge denied by Islamabad. The two sides used fighter jets, missiles, drones and artillery before agreeing to a ceasefire after four days of fighting, their worst in nearly three decades.
Pakistan's allocation of 2.12 trillion rupees ($7.45 billion) for defence in the outgoing fiscal year included $2 billion for equipment and other assets. An additional 563 billion rupees ($1.99 billion) was set aside for military pensions, which are not counted within the official defence budget.
India’s defence spending in its 2025–26 (April-March) fiscal year was set at $78.7 billion, a 9.5% increase from the previous year, including pensions and $21 billion earmarked for equipment. It has indicated it will step up expenditure following the conflict with Pakistan.
Sharif's government has projected 4.2% economic growth in 2025-26, saying it has steadied the economy, which had looked at risk of defaulting on its debts as recently as 2023. Growth this fiscal year is likely to be 2.7%, against an initial target of 3.6% set in the budget last year.
Pakistan’s growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8% and 6.0% growth is expected in 2025, according to the Asian Development Bank.
Expansion of the economy should be aided by a sharp drop in the cost of borrowing, the government says, after a succession of interest rate cuts by the central bank. But economists warn that monetary policy alone may not be enough, with fiscal constraints and IMF-mandated reforms still weighing on investment.
Finance Minister Muhammad Aurangzeb said on Monday that he wanted to avoid Pakistan’s boom and bust cycles of the past.
“The macroeconomic stability that we have achieved, we want to absolutely stay the course,” he said. “This time around we are very, very clear that we do not want to squander the opportunity.”
($1 = 282.0000 Pakistani rupees)
(Reporting by Ariba Shahid, Saeed Shah and Asif Shahzad in Islamabad; Editing by Raju Gopalakrishnan and YP Rajesh // REUTERS)
