Pakistan Likely to Increase Defence Budget in FY 2025-26

ISLAMABAD: In light of recent “Indian aggression” and escalating regional security threats, the Pakistani government is weighing a further hike in its upcoming defence budget, beyond the previously proposed 18% increase.

According to high-level sources, deliberations are currently underway among the Ministry of Finance, the Ministry of Defence, and representatives of the International Monetary Fund (IMF) to assess whether the already substantial hike will suffice for fiscal year 2025–26.

The additional funds are intended not only to boost the country’s defence posture but also to strengthen indigenous research and development capabilities, replenish military resources, and settle past liabilities.

While addressing media inquiries regarding the budget discussion with the IMF, Finance Minister Muhammad Aurangzeb reaffirmed Pakistan’s fiscal commitments:

“We remain committed to stay the course both in terms of structural reform agenda and meeting all quantitative and structural benchmarks.”

Before May 10, the federal government had decided to increase defence spending by 18% from last year’s Rs2.1 trillion budget. This increase was reached through consensus between the Pakistan Peoples Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N) under Prime Minister Shehbaz Sharif’s leadership.

In contrast, the IMF’s projected defence allocation was slightly lower a 12% increase, or Rs2.42 trillion. However, the lender is reportedly flexible, as long as Pakistan maintains its primary budget surplus target of Rs2.2 trillion, approximately 1.7% of GDP.

Fresh Push to Fund Armed Forces and Strategic Assets

Sources suggest that due to the evolving threat landscape, an even larger defence allocation, potentially up to 25% higher, is under serious consideration. This would amount to an additional Rs500 billion. A significant portion would be channelled into the Armed Forces Development Programme, which currently sits at Rs270 billion and is expected to see a major boost.

Provincial governments may also be called upon to contribute. At a recent meeting, Petroleum Minister Ali Pervaiz Malik proposed that provinces should share at least half of the increased defence burden:

“India attacked Punjab and Sindh provinces and there is a need that also the provinces now should come forward to bear the cost.”

Given the federal fiscal constraints and provincial surpluses, this shift in cost-sharing could be crucial.

Reallocating Subsidies and Development Funds

The government is also reviewing internal financial reallocations. Officials are considering reducing unproductive subsidies, especially in the power and banking sectors, to create fiscal space for increased defence spending. Despite falling electricity rates, over Rs1 trillion remains earmarked for power sector subsidies, and the Power Division continues to push for more funding.

Meanwhile, coalition parties are lobbying for a boost in the Public Sector Development Programme (PSDP), which is currently proposed at Rs921 billion. A push to raise it above Rs1 trillion is being resisted by the Finance Ministry, which argues for prioritizing defence.

Institutional Gaps and Tax Collection Woes

The Federal Board of Revenue (FBR) remains a bottleneck in the broader financial equation. Persistent failures to meet tax targets and deliver on reforms have undermined the state’s fiscal capacity. Recent IMF-FBR talks reportedly hit snags over missed benchmarks and poor policy outcomes.

In response, Prime Minister Shehbaz Sharif has formed a committee to tackle issues like stuck-up tax refunds for refineries. There is also growing consensus on eliminating the “unjustified” 1% advance income tax on exports under the new standard tax regime.

National Outrage After Deadly Attack on School Bus

The urgency of defence enhancement gained new weight following a terrorist attack on a school bus in Khuzdar, Balochistan. According to the Prime Minister’s Office, the act was perpetrated by “state sponsored proxies (Fitna Al Hindustan)” of India:

“In a reprehensible and cowardly act of terrorism, a school bus carrying innocent children was targeted today in Khuzdar, Balochistan…”

The attack left three children and two soldiers martyred, with 53 others injured, including 39 children, 8 of whom are in critical condition.

The government described this as part of India’s “proxy war” tactics, following its failure to pressure Pakistan through conventional military means. Civilian targets in Balochistan and Khyber Pakhtunkhwa have been increasingly under attack in what officials call a deliberate destabilization campaign.

Given the deteriorating security situation, the government is now exploring a one-time, exceptional increase to the defence budget. The goal is to strengthen operational capabilities across all branches of the military, the Army, Navy, and Air Force, and prepare for continued regional instability.

With IMF officials, including Jihad Azour, currently in Islamabad and engaging in key meetings with national leadership, these budget decisions are expected to be finalized soon.