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Pakistan increases its defence budget by 20%, but cuts overall spending in 2025-2026

Pakistan will increase its defence spending by 20% following a deadly conflict last month with India, but it will cut overall federal expenditure by 7% for fiscal 2025-2026 to 17.57 trillion Rupees ($62 billion).

The budget that was presented by the government of Prime Minister Shehbaz Shariff on Tuesday allocated 2,55 trillion rupees (about $9 billion) for defence from July 2025 to June 2026. This is an increase from the previous 2.12 trillion.

The projected deficit was 3.9% of the GDP, compared to the target of 5.9% for 2024-25. The inflation was forecast at 7.5%, and the growth rate at 4.2%.

South Asia wants to boost its growth and strengthen its defenses, after the worst fighting it has had with its neighbor in almost three decades. It also wants to meet the requirements of an International Monetary Fund financing programme.

In a recent statement, Sharif stated that "after defeating India in conventional warfare, we now have to surpass them in the economic area."

Pakistan is also facing the uncertainty caused by new import tariffs imposed by its largest export market, the United States.

In April, 26 men were killed by Islamists in an attack against Hindu tourists in Indian Kashmir.

Islamabad has denied New Delhi’s claim that militants are backed by Pakistan.

The four-day battle featured jets as well as missiles, drones, and artillery.

Both India and Pakistan increase military spending

The Pakistani allocation of 2,12 trillion rupees (roughly $7.45 billion) to defence in 2024-25 includes $2 billion for equipment, other assets and pensions.

India's defense spending for its fiscal year 2025-26, (April-March), was set at 78.7 billion dollars, an increase of 9.5%. This includes pensions, and 21 billion dollars allocated to equipment. It has also indicated that it will increase defence spending.

Sharif's Government has projected 4,2% economic growth for 2025-2026. It says it has stabilised the economy which was at risk of defaulting its debts until 2023. The growth rate for this fiscal year will likely be 2.7% compared to the budgeted 3.6%.

Pakistan's economic growth is far behind that of the rest of South Asia. South Asian countries are expected to grow by 5.8% on average in 2024 and 6.0% according to the Asian Development Bank.

The IMF had requested that the government complete the privatisation process of Pakistan International Airlines. Finance Minister Muhammad Aurangzeb confirmed this.

The government has said that a drop in borrowing costs will help boost growth, following a series of interest rate reductions. However, economists warn that the monetary policy may not be sufficient to boost investment. Fiscal constraints and IMF mandated reforms are still holding back investment.

Aurangzeb stated on Monday that his goal was to avoid the boom-and-bust cycles of old.

He said: "The macroeconomic stability that we have achieved, we want to stay on course." This time, we're very clear about not wanting to waste the opportunity. $1 = 282.0000 Pakistani Rupees (Reporting and writing by Ariba, Saeed, and Asif in Islamabad, Charlotte Greenfield, and editing by Raju, YP Rajesh, and Kevin Liffey).

(source: Reuters)