As the National Economic Council (NEC) has approved an ambitious national development budget of Rs 3.9 trillion for fiscal year 2025-26, it has also sparked calls from provincial governments for a review of the National Finance Commission (NFC) award and agriculture income tax laws, demanding adjustments to align with regional needs.
Provinces, particularly Khyber Pakhtunkhwa and Sindh, raised concerns over their fiscal share and the impact of national tax policies on their economies.Â
Khyber Pakhtunkhwa is pushing for a higher share of federal resources, especially in light of the recent merger of tribal districts, and has called for an urgent reopening of the NFC award. The provincial government is requesting additional allocations to account for the increased administrative costs and services for the merged regions.Â
Prime Minister Shehbaz Sharif assured Khyber Pakhtunkhwa that an NFC meeting would be convened in August to address these concerns.
Sindh, meanwhile, has called for the government to review the agriculture income tax issue with the International Monetary Fund (IMF). Despite the provincial government passing new agriculture income tax laws, they have yet to be enforced, and the Sindh government is seeking reconsideration of these policies in light of the IMF’s broader fiscal guidelines. This move is seen as crucial to the province’s agricultural economy, which has faced stagnation with only 0.6% growth this year.
The NEC, led by Prime Minister Sharif, approved the development plan while also acknowledging these concerns. The federal government has prioritised politically-driven development projects, particularly in road infrastructure, but reduced budgets for crucial sectors like health, education, space research, and atomic energy.Â
Meanwhile, Punjab has taken the lead in next year’s development plan with a record Rs1.204 trillion, marking a 20% increase over the Centre’s allocation. This represents a 10.6% rise compared to the current year’s allocation of Rs1.089 trillion. For the first time, a federating unit has exceeded the federal allocation, highlighting the growing financial strength of the provinces.
Sindh follows closely behind with an allocation of Rs967 billion, up 27% from Rs705 billion in the current year. Both Punjab and Sindh increased their allocations by Rs16 billion and Rs80 billion, respectively, from what they had originally reported to the Annual Plan Coordination Committee (APCC) on Monday.
Khyber Pakhtunkhwa has announced a Rs417 billion development plan, marking a significant 33% increase from its current allocation of Rs313 billion. Although the province had initially reported a Rs440 billion allocation to the APCC, it scaled down its plan by Rs23 billion.
Balochistan, largely reliant on federal support, has set its development budget at Rs281 billion, reflecting a 12% rise from Rs252 billion this year. The allocations for State-Owned Enterprises (SOEs) projects have also increased to Rs355 billion, up from Rs288 billion just two days earlier.
Despite their substantial allocations, the Chief Ministers of Sindh and Khyber Pakhtunkhwa expressed dissatisfaction over the exclusion of some of their projects from the federal budget. On the other hand, Balochistan’s Chief Minister thanked the Centre for its special attention to the province. Khyber Pakhtunkhwa’s Chief Minister’s adviser on finance, Muzammil Aslam, acknowledged the Centre’s limitations given the current circumstances.
The government has set a growth target of 4.2% for next year, supported by agriculture growth of 4.4%, industry at 4.3%, and services at 4%. Inflation is expected to be at 7.5%, influenced by the low base effect and risks arising from ongoing trade tensions and domestic tariff rationalization.
National savings are targeted to reach 14.3% of GDP in FY 2025-26, slightly higher than the current year’s 14.1%, while total investment is projected at 14.7% of GDP, up from 13.8% in FY 2024-25. The government aims to reduce the savings-investment gap through modest external inflows.
Public investment is expected to rise from 2.9% to 3.2% of GDP, while private investment is projected to increase from 9.1% to 9.8%. Fiscal and monetary policies will focus on consolidation and stability, with inflation expected to remain at 7.5%.
Agriculture growth will be bolstered by a recovery in key crops (6.7%) and cotton ginning (7%), as well as strong livestock performance. The industrial sector is poised for a significant revival, with a 3.5% growth in large-scale manufacturing (LSM) and 3% growth in mining and quarrying. The construction, energy, gas, and water supply sectors will continue to experience growth momentum.
The services sector, the largest contributor to GDP, is projected to grow by 4%, driven by stronger performances in wholesale and retail trade, transport, storage and communications, financial services, and real estate.
