- How Pakistan’s rigid fiscal priorities and IMF constraints force trade-offs that sacrifice long-term development
- By: Saqib Ali Khan
Pakistan’s debt servicing fell by roughly PKR 383 billion this year. For a country that has spent nearly every recent budget cycle under managed austerity, that is not a small thing — it was the first real fiscal breathing room in years, created by two years of State Bank policy rate cuts, from 22 percent down to 11.5 percent, working their way through the cost of domestic borrowing. Almost none of it reached the Public Sector Development Programme.
The federal government’s development budget was held flat in nominal terms at roughly PKR 1 trillion in the FY2026–27 budget presented on 12 June — even as the FBR’s tax collection target rose by 18 percent, meaning development spending’s actual share of the federal budget kept shrinking without a single additional rupee being cut. Provincial governments absorbed a further round of negotiated cuts on top of that: Punjab alone gave up PKR 701 billion, Sindh 110 billion, Khyber Pakhtunkhwa 109 billion. Meanwhile the defence budget rose by roughly 18 percent, to close to PKR 3 trillion — a rise the finance minister linked explicitly to the military standoff with India and a new defence cooperation agreement with Saudi Arabia.
This is worth pausing on, because it is a different problem than the one Pakistan’s fiscal debate usually describes. The standard story is austerity: the IMF demands cuts, and development spending is squeezed to meet the primary surplus target. That story was true in FY2025–26, when the PSDP was cut outright by PKR 173 billion. It is not quite true of FY2026–27. Real fiscal space opened up this year, for the first time in a while. The question was never really whether Pakistan could afford to invest during consolidation — the interest savings answered that. The question was what the space, once freed, would be used for. And the answer, on the evidence of this budget, is: not development. Call it what it actually is — not an austerity problem, but a guns-and-butter problem.
John Maynard Keynes built The General Theory around a single objection to classical economics: that a rupee is not a rupee, fiscally speaking. Classical economists treated a rupee cut from public investment and a rupee cut from a subsidy as identical events — cost is cost. Keynes rejected that. Government investment in infrastructure, health, and education builds a country’s long-run productive capacity in a way other spending does not, and a state that treats development as the automatic place to find savings — every time competing priorities emerge — isn’t balancing its books. It’s quietly spending down its own future.
Keynes’s relevance to Pakistan runs deeper than domestic fiscal theory, too. As Britain’s lead negotiator at Bretton Woods, he pushed for a global reserve currency — the “bancor” — backed by a clearing union designed to place the burden of international payment adjustment on surplus and deficit countries alike, rather than overwhelmingly on debtors. Washington rejected it, and the world got the IMF instead: an institution that places nearly the entire weight of adjustment on the country in the programme. Pakistan, two years into a $7 billion Extended Fund Facility, is living the exact dynamic Keynes tried and failed to design out of the postwar system eighty years ago — administered, with a certain historical irony, by the institution he helped build.
- It is a story about what gets treated as negotiable and what does not — about a fiscal culture in which defence and debt servicing are fixed points around which everything else must bend.
I want to be careful here, because it would be easy to overstate this argument, and doing so would make it less useful, not more. Pakistan’s security environment is not a fiscal abstraction that can be argued away with a multiplier calculation. The government’s defence allocation reflects a genuine assessment of external threat that no finance minister can simply set aside. Keynes himself wrote from inside a Britain that retained full monetary sovereignty and could finance counter-cyclical spending in its own currency, largely on its own terms; Pakistan, as a programme country with a primary surplus target it must hit to keep IMF disbursements flowing, does not have that freedom. The Keynesian question is not whether Pakistan should defund its defence to fund its PSDP. That is a strategic and political judgment well beyond what a fiscal framework can settle on its own.
The question is narrower, and I think more answerable: whether this trade-off is being made transparently, with explicit attention to what it costs the country’s long-run productive capacity — or whether development spending has simply become the default place fiscal space gets found, and taken from, whenever something else needs paying for. On the evidence of two consecutive budget cycles, it is the latter. Development was cut outright last year, when there was no space. This year, when space finally opened, development still did not get it.
That is not, in the end, a story about how much Pakistan is spending. It is a story about what gets treated as negotiable and what does not — about a fiscal culture in which defence and debt servicing are fixed points around which everything else must bend, and public investment is the residual claimant, absorbing whatever pressure is left once the fixed points have been honored. Keynes’s real argument, underneath the economics, was that a country’s future is made or unmade by exactly these composition choices — not by the headline deficit number, but by what a government decides is protected and what it decides can wait. Pakistan’s budget-makers do not have to accept every constraint Keynes rejected. But the question he insisted on asking — what does this pattern of spending actually build, and what does it quietly let erode — is one Pakistan’s own fiscal debate is still not asking often enough.
A fuller academic treatment of this argument, with complete fiscal data and sourcing, is available on SSRN
- Saqib Ali Khan is a senior policy and governance professional who supported the implementation and advisory process for the Sindh SME Competitiveness Strategy, and has led SME, investment, and trade strategy work engaging Pakistan’s leading business bodies, including FPCCI, the Karachi Chamber of Commerce and Industry, and the Pakistan Business Council. He has worked with UN ITC, USAID, the World Bank, FCDO, and the EU across governance and private sector development.