Pakistan Economic Growth to Slow Amid Budget Cuts and Global Crisis

Pakistan’s government has warned that the country’s economic growth will slow during the current and next fiscal years due to a nearly 20 percent cut in development spending for fuel subsidies and the inflationary impact of global supply chain disruptions stemming from the war in the Middle East.

Planning Minister Ahsan Iqbal made the announcement on Monday, stating that the reduction in the Public Sector Development Programme (PSDP) would directly affect the nation’s growth target of 4.2 percent for the current fiscal year. He confirmed that the PSDP had been slashed from Rs1.01 trillion to Rs837 billion, a reduction of Rs173 billion, to fund the Prime Minister’s Austerity Programme aimed at subsidizing fuel prices, particularly diesel, during the critical harvesting season.

Iqbal said the cut in development spending, combined with rising international oil prices and inflation, would result in an economic slowdown. While international lenders had previously projected Pakistan’s growth rate between 3.2 and 3.5 percent, this marks the first official acknowledgment that growth would fall below the government’s target.

According to the minister, the negative impact on growth will be less severe in the current fiscal year because three quarters of it have already passed, but will be more pronounced in the first six months of the next fiscal year, even if the conflict in the Middle East ends immediately. He noted that global supply chains typically take six to nine months to normalize after such disruptions.

Despite the challenges, Iqbal expressed cautious optimism about the second round of US-Iran talks being facilitated by Pakistan, suggesting that diplomatic progress could help ease global tensions and avert a broader economic stagflation. He emphasized that both parties would need to show flexibility to reduce threats to the global economy.

The minister highlighted that Pakistan’s GDP growth had improved to 3.8 percent in the first two quarters (July–December) of the current fiscal year, up from 1.9 percent in the same period the previous year, before the external shock of the Middle East crisis affected the country and other economies. He attributed the earlier improvement to proactive economic management but warned that rising oil prices and disrupted supply chains had since increased export costs globally.

Iqbal defended the government’s decision to manage fuel prices through subsidies rather than allowing domestic and external deficits to spiral out of control. He explained that initial increases in diesel and petrol prices by Rs55 per litre were later frozen for two weeks, supported by a Rs129 billion subsidy financed through a Rs100 billion cut in development spending. As tensions escalated, particularly with the potential closure of the Strait of Hormuz, fuel prices were raised further—by Rs137 for petrol and Rs184 for diesel—before the prime minister reduced diesel prices by Rs135 per litre to shield farmers during harvest.

To combat rising inflation, the government has increased the frequency of the National Price Monitoring Committee (NPMC) meetings from monthly to weekly, coordinating with provincial authorities to enforce price controls and reduce transport fares in line with the diesel price reduction policy. Iqbal reported that average inflation had risen to 5.7 percent in the first nine months of the fiscal year, up from 3.5 percent the previous year, with consumer price inflation jumping to 7.3 percent in March compared to just 0.7 percent the year before, driven largely by non-food and energy prices.

Looking ahead, Iqbal stressed that the only viable path to offset economic losses and bridge the gap between foreign exchange outflows and inflows is through a strong focus on exports. He stated that the entire government would prioritize budget proposals aimed at boosting exports to “catch up” on lost economic momentum.