Fiscal consolidation to continue: Pakistan is set to announce the 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 into the tax net. Furthermore, we believe this Budget FY26 hold high importance from a 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 the cap on Debt Servicing Surcharge (DSS) amongst others.
§ Government’s commitment to IMF for FY26 Budget: The Government has committed to IMF to continue with fiscal consolidation in the FY26 budget to ensure debt sustainability. The government targets a primary surplus of 1.6% of GDP (vs 2.0-2.1% in FY25), a surplus for a third consecutive year after 2 decades. The government has also committed to using any windfall dividend expected from the 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, the lowest % growth in the last 6 years. FBR has achieved a 5-year revenue CAGR of 25% from FY21-25. We believe that 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%. We estimate that the remaining 4-5% growth translates into additional tax measures of Rs500-600bn.
§ Expected revenue measures: A few expected measures which are already been 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 pension tax, (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: The government is expected to announce some relief measures, namely (1) an extension of the exemption limit on salary or reduction of the tax rate by 2.5% for all salary brackets, (2) rationalization of trade duties, (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 is (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 ownership, and (7) Increased tax on land registration and foreign travel among.
§ GDP growth target is likely at 3.5-4.5% for FY26: On the economic indicators side, the government is reportedly setting up a GDP growth target of 3.5-4.5%. We expect the GDP growth target for FY26 to be 3.5-4.0%, led by services.
§ Impact on Stock Market: We believe the budget will likely be neutral for the market in the short term. However, the market will be positive in the midterm, considering the stable economic roadmap this budget would signal. Nonetheless, the relationship with India will keep the market volatile until a complete/new peace agreement is signed.
§ Sector-wise, we expect Budget FY26 to be neutral to positive for cement, steel, oil and gas, consumers, and IPPs, while neutral for OMCs, IT, Banks, Pharma, Autos, and Textiles.
§ We mentioned in our Annual Strategy Report released on Nov 16, 2024, that approval of the budget in line with IMF guidelines would be a key catalyst for re-rating the market multiple to the historical average. Currently, the market is trading at 2026E PE of 5.3x, 24% lower than the historic forward PE of 7x. We maintain our base case Index Target of 127,000 for Dec 2025. However, with higher cash liquidity, the index can cross the 150,000 mark, assuming a successful IMF review in Sep 2025 and political/geo-political stability.
Courtesy – Topline Research
