Pakistan hikes defence budget by 20% despite economic challenges, cuts overall spending in 2025-26

Pakistan has hiked its defence spending by a steep 20% after suffering serious setbacks from Indian strikes during Operation Sindoor despite battling severe economic challenges and had to slash its overall federal expenditure for fiscal 2025-26 by a hefty 7% to 17.57 trillion rupees ($62 billion) in its budget.

The military spending has been increased even as Pakistan is battling weak finances and tremendous economic challenges.

The overall spending planned in the budget is down 7% to 17.57 trillion rupees ($62 billion).

The budget presented on Tuesday by Prime Minister Shehbaz Sharif’s government allocated 2.55 trillion rupees ($9 billion) to defence in July-June 2025-26, up from 2.12 trillion.

It projected a deficit of 3.9% of GDP against the 5.9% targeted for 2024-25. Inflation has been projected at 7.5% and growth at 4.2%.

Pakistan has to kickstart growth while meeting the strictures of an International Monetary Fund finance programme. It also has to cope with the uncertainty of new import tariffs being imposed by the United States, which is its biggest export market.

Pakistan boosts military spending

Besides, Pakistan has allocated 742 billion Pakistani rupees ($2.63 billion) to military pensions, taking the entire defence budget to 3.292 trillion Pakistani rupees ($11.67 billion). That included 704 billion Pakistani rupees ($2.5 billion) in spending on equipment and other physical assets.

The Sharif government has projected 4.2% economic growth in 2025-26, claiming that it has steadied the economy which was facing the risk of defaulting on its debts as recently as 2023. Growth this fiscal year is likely to be 2.7%, against the budgeted target of 3.6%.

Pakistan’s growth lags far behind the region. In 2024, South Asian countries grew by an average of 5.8% and the Asian Development Bank expects 6.0% in 2025.

Finance Minister Muhammad Aurangzeb said the government intends 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 series of interest rate cuts.

Economists, however, warn that monetary policy alone may not be enough, as fiscal constraints and IMF-mandated reforms are still weighing on investment.

Aurangzeb said, “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.