Pakistan: Federal Budget FY26 Initial Reactions

The finance minister promised “strategic direction” and the FY26 Budget has a coherent thought process towards that aim. The formal economy - already overtaxed - appears to have been spared, and the overall thrust is towards expanding the tax net by targeting non tax filers and removing exemptions.

According to Intermarket Securities, there is relief - albeit minor - for the salaried class and small/ medium corporates, while non-tax filers will face severe impediments in purchasing property and 4-wheelers, as well as retaining bank accounts.

Retailers are being focused on too, with e-commerce/ online marketplaces being formally brought into the tax net, and there is a push for improving domestic productivity with the reduction of custom duties on multiple lines.

Discipline under the IMF program has continued to sustain. Instead of stepping the foot on the growth accelerator too quickly (the FY26 GDP growth target is a modest 4.2%), the Budget focuses on increasing tax to GDP and curtailing current expenditure.

The projected fiscal deficit of 3.9% of GDP may ultimately prove to be too ambitious (in part because of an optimistic non-tax revenue target), but Pakistan should still deliver its 3rd straight primary surplus - which should hold more importance for the IMF.

Moreover, despite risks to the headline fiscal deficit, the projected development expenditure for once does not appear to be completely out of reach.

The stock market is anticipated to react positively to the Budget. There has been no change to the tax rate on dividends and capital gains, which remains at 15%. This is now more favorable as compared to fixed income investments, WHT on profit on debt has been raised to 20%. Domestic liquidity is expected to continue to gravitate towards equities.

Stabilization achieved in FY25

The economy stabilized in FY25, evidenced by inflation coming off sharply, the current account swinging into surplus (a rarity in Pakistan), and the buildup in foreign exchange reserves.

GDP growth was modest in FY25, on weak agriculture dynamics and anemic industrial growth. A low base should help agriculture rebound in FY26 while manufacturing should benefit from lower interest rates.

The government aims moderate and more sustainable economic growth in Pakistan, backed by a modest current account deficit. This discipline is important to avoid the frequent balance of payment crises of the last 15 years.

Pakistan estimates a fiscal deficit of 3.9% of GDP in FY26 as against 5.6% in FY25. This improvement is premised on a broadening of the tax net and discipline on current expenditure.

While the headline fiscal deficit appears ambitious (SBP profits may fall due to lower interest rates), Pakistan should post its 3rd straight primary surplus in FY26. Importantly, the primary balance should remain in surplus.

CPI projections appear realistic, with inflation expected to converge towards the long-term mean. However, this likely dampens prospects for large cuts in the interest rates, which has already halved from an all-time high of 22% last year to 11% at present.

Iran seizes four tankers smuggling oil

Iranian naval forces have seized four tankers in the Persian Gulf, thwarting an attempt to smuggle thousands of liters of oil.

Ebrahim Taheri, a prosecutor in Hormozgan Province, announced the operation on Tuesday, detailing how naval patrols, backed by a marine commando unit, successfully intercepted the vessels.

The operation led to the discovery and confiscation of significant quantities of fuel found both within the tankers and in accompanying large fuel containers.

The seized vessels have been turned over to the National Iranian Oil Products Distribution Company (NIOPDC). This recent action echoes a prior incident on March 31, where the Islamic Revolution Guards Corps (IRGC) Navy apprehended two foreign tankers transporting over three million liters of smuggled diesel fuel, resulting in the arrest of all 25 crew members.

Iran grapples with rampant fuel smuggling activities, both by land and sea. This is driven by the country's heavily subsidized fuel prices, which are among the lowest globally, creating a large price difference with neighboring countries. The ongoing smuggling operations are a persistent challenge for Iranian authorities seeking to control the illegal outflow of the country’s subsidized resources.

 

Donald Trump Aspiring "Field Marshall"

According to media reports, hundreds of US Marines arrived in Los Angeles overnight and more were expected on Tuesday under orders from President Donald Trump, who has also activated 4,000 National Guard troops to quell protests despite objections from California Governor Gavin Newsom and other local leaders.

The city has seen days of public outrage since the Trump administration launched a series of immigration raids on Friday, though local officials said the demonstrations on Monday were largely peaceful.

About half of the roughly 700 Marines that Trump ordered to Los Angeles arrived on Monday night, and the remaining troops will enter the city on Tuesday, a US official told Reuters.

Los Angeles Mayor Karen Bass told KABC that more than 100 people had been arrested on Monday but that the majority of protesters were nonviolent.

The Marines will protect federal property and personnel alongside Guard troops, US Northern Command said in a statement announcing the move. There were approximately 1,700 Guard troops in greater Los Angeles as of Monday, with more on the way.

Trump has justified his decision to deploy active military troops to Los Angeles by describing the protests as a violent occupation, a characterization that Newsom and Bass have said is grossly exaggerated.

Newsom accused Trump of sending troops to deliberately inflame the situation and said the president's actions made it more difficult for local law enforcement to respond to the demonstrations.

In a social media post on Tuesday morning, Trump said Los Angeles would be "burning to the ground right now" if he had not deployed troops to the city.

Since protests broke out on Friday they have been largely peaceful, although there have been isolated clashes, with some demonstrators throwing rocks and other objects at officers, blocking an interstate highway and setting several cars ablaze. Several businesses were looted, including an Apple store and a CVS pharmacy. Police have responded by firing projectiles such as pepper balls, as well as flash-bang grenades and tear gas.

Police said they had arrested 21 people on Sunday on charges including attempted murder with a Molotov cocktail and assaulting an officer, and officials said they expected more arrests after reviewing video.

In a statement on Monday, Los Angeles Police Chief Jim McDonnell said the department had not been notified that any Marines were traveling to the city and that their arrival "presents a significant logistical and operational challenge."

Trump's Marine deployment escalated his confrontation with Newsom, who filed a lawsuit on Monday asserting that Trump's activation of Guard troops without the governor's consent was illegal. The Guard deployment was the first time in decades that a president did so without a request from a sitting governor.

The use of active military to respond to civil disturbances is extremely rare.

"This isn't about public safety," Newsom wrote on X on Monday. "It's about stroking a dangerous President's ego."

The top Democrat on the Senate Armed Services Committee, Senator Jack Reed, said he was "gravely troubled" by Trump's deployment of active-duty Marines.

"Since our nation's founding, the American people have been perfectly clear, we do not want the military conducting law enforcement on US soil," he said.

U.S. Marines are trained for conflicts around the world - from the Middle East to Africa - and are also used for rapid deployments in case of emergencies, such as threats to US embassies.

In addition to combat training, which includes weapons training, some units also learn riot and crowd control techniques.

 

 

 

 

Iran obtains Israeli nuclear secrets

Iran claims it has obtained a large batch of information on Israel’s nuclear program, its intelligence minister said on Sunday, without providing any evidence to support it, reports Euronews.

Speaking to Iranian state television after a cabinet meeting, Esmail Khatib said the Intelligence Ministry had acquired “an important treasury of strategic, operational and scientific intelligence” from Israel, which he said had been “transferred into the country with God’s help.”

Khatib alleged that thousands of documents had been seized, including information related to Europe, the US and other individual countries, though he did not explain how the intelligence was obtained.

Khatib, a Shiite cleric who was sanctioned by the US Treasury in 2022 for his alleged involvement in cyber espionage, said the documents would be made public soon. He claimed they were retrieved through “infiltration” and “access to sources,” but offered no specifics or proof.

The announcement, which came days before Tehran is expected to face renewed diplomatic pressure over its own atomic activities appears to be aimed at countering a high-profile Israeli intelligence operation in 2018.

At the time, Israeli Prime Minister Benjamin Netanyahu said his agents had smuggled out a “half-ton” of documents from Iran concerning its nuclear program.

The operation was cited by US President Donald Trump when he withdrew the US from the 2015 nuclear accord with Iran.

The latest Iranian claims come as the board of governors at the International Atomic Energy Agency (IAEA) prepares to meet this week, with Western nations reportedly planning to censure Iran over its failure to clarify long-standing questions about its nuclear activities.

Such a move could lead to the issue being referred to the UN Security Council and potentially trigger the reimposition of UN sanctions under the “snapback” mechanism outlined in the 2015 deal.

Iran has signaled it will reject a US-backed proposal after five rounds of nuclear talks, raising concerns of a renewed crisis.

Tehran is currently enriching uranium up to 60% purity — just short of the 90% level needed for nuclear weapons — and has stockpiled enough material to build several bombs.

Without an agreement, analysts warn that Iran’s already struggling economy could worsen further, potentially fuelling domestic unrest.

The risk of Israeli or US military action against Iranian nuclear sites also remains, amid fears that Tehran could sever cooperation with the IAEA and dash toward developing a nuclear weapon.

State of Pakistan Economy

Ministry of Finance (MoF) has released Economic Survey of Pakistan for FY25 and based on that and in line with numbers reported by National Accounts Committee (NAC), Pakistan has provisionally recorded real GDP growth of 2.68% during FY25 as against 2.51% in FY24.

However, growth for FY25 is lower than the long-term average of 4.7% and last five-year growth of 3.4%. This FY25 growth of 2.68% is broadly in line with revised projections of the IMF and World Bank, reported at 2.6% and 2.8%, respectively, published in April 2025. However, it is less than government’s initial target of 3.6% growth for FY25.

According to Topline Securities, this number will be revised down especially due to enlarged growth numbers of industrial segment at 4.77% compared to actual growth in 9MFY25 at negative 1%.

Services sector growth has posted provisional growth of 2.91% in FY25 as compared to 2.19% change in FY24. Within services, Public Administration and Social Security (General Government) saw highest growth of 9.92% while wholesale and retail trade saw a meagre 0.14% rise. The brokerage house believes, towards end of the year, services numbers for FY25 will be revised up as 9MFY25 growth average is already 2.97%.

Industrial segment recorded provisional growth of 4.77%, highest in 4 years, contrary to contraction of 1% in 9MFY25, Industrial sector has posted provisional growth of 4.77% in FY25, highest in 4 years. Within this, electricity gas & water supply, construction, and manufacturing sector are likely to grow by 28.88%, 6.61%, and 1.34%. While mining & quarrying and Large-Scale Manufacturing (LSM) are expected to post decline of 3.38% and 1.53%, respectively.

Agriculture growth at 9 years low, as agri sector is expected to post lowest growth of 0.56% in 9 years as against 5 years average growth of 3.38%. Lower growth is attributed to decline in important crops production and cotton ginning by 13.5% and 19.0%, respectively. While other crops posted growth of 4.78%. Livestock, Forestry and fishing will post growths of 4.72%, 3.03% and 1.2% respectively. On the other hand, important crops and cotton will post declines of 13.49% and 19.03%, respectively.

Other takeaways from press briefing of Finance Minister and economic survey document

Finance Minister mentioned that Government has undertaken various structural reforms which were warranted to sustainable economic growth and will continue to do so in upcoming fiscal years.

Recoveries in DISCOs have improved due to change in their Governance Structure. GoP has constituted professional board structure in these DISCOs.

Mobilization of PKR1.25 trillion through banks will play important role in clearing this legacy circular debt.

GoP has saved PKR0.8 trillion to PKR1 trillion in interest expense in FY25 due to decline in interest rates.

GoP has already implemented defined contribution pension plan starting Jul 01, 2024, for all new recruits to address pension issues.

Rightsizing of federal Government is also under process and being implemented with true spirit

Pakistan posted GDP growth of 2.68% in FY25, a bit lower than target growth due to underperformance in agriculture segment. Current Account remained in Surplus in 10MFY25, and the full year is expected to close in surplus. Full year remittances are expected to be around US$38 billion. Freelancers have earned over US$400 million out of total IT Exports of US$3.1 billioon.

During FY25, Important crops declined by 13.49% amidst lower cultivation area and adverse weather conditions, significantly affecting cotton (down 30.7%), wheat (down 8.9%), sugarcane (down 3.9%), maize (down 15.4%), and rice (down 1.4%).

Globally economic growth is expected at 2.8% in 2025, lower from 3.3% achieved in 2024.

Average time to maturity of the domestic debt has increased from 2.9 years to 3.5 years. To highlight, this is also one of the indicative targets of the IMF.

The year 2024 was recorded as Pakistan’s ninth warmest year in the last 64 years, with an average temperature of 23.52°C and rainfall levels 31% above the historical average.  

 

 

Handling of Gaza flotilla incident was a 'diplomatic failure'

The Madleen Gaza Freedom Flotilla was "a completely unnecessary event that should have ended as a diplomatic event," former Navy Commander Major General (res.) Eliezer "Chiny" Marom said on Monday during an interview, reports The Jerusalem Post.

"It's not a military event; it's entirely a diplomatic event. Ultimately, we failed in this regard, and the ship set out from the shores of Sicily and arrived here. Therefore, the last barrier before breaking the maritime security blockade was carried out by the Navy," Marom said.

"The whole event is entirely civilian; it's not a military event," he continued. "We have dealt with many such events - some of which you may not even know about, as they never made headlines over the years - and we failed with this one. After the Mavi Marmara incident in 2011, a flotilla of 20 ships was organized; we acted diplomatically and legally in various ways, and ultimately, not a single one reached the shores of Israel."

"We imposed a blockade on the Gaza Strip. The blockade was imposed in December 2009, if I'm not mistaken. It's a blockade recognized by the whole world, and it means something very simple - a country has a right to defend itself; it imposes a blockade, and it must be enforced equally on everyone," Marom said.

Breaking Gaza blockade would mean Iranian ships in Gaza within months. "If you allow one ship in, then everyone can enter. Meaning, if someone says, "Let's allow this ship to enter," then there's no longer a blockade. To stop that ship, you need the blockade itself. If you cancel that blockade, within three months Iranian ships will be in Gaza - and you don't want that to happen," he added.

Regarding the Madleen incident, "I don't think the world is too excited about this," Maron said. "There have already been flotillas since the Marmara incident, and we handled them just fine. The Navy knows how to learn lessons and take things seriously. I want to commend the fighters who did an outstanding job."

France and Britain not likely to recognize Palestinian state

According to the sources, France and Britain will abandon plans to recognize a Palestinian state at an upcoming conference in New York to be held between June 17 and 20. France had been lobbying the UK and other European allies to recognize a Palestinian state at the conference.

President Emmanuel Macron had described the move as “a moral duty and political requirement”, suggesting it could come in return for Saudi Arabia recognizing Israel at the conference.

The Guardian has reported that French officials briefed their Israeli counterparts this week that the conference would not be the moment for recognition. Instead, it will now focus on outlining steps towards recognition, contingent on a series of measures and concessions from the Palestinians.

These will include a permanent ceasefire in Gaza, the release of Israeli captives, reform of the Palestinian Authority, economic reconstruction and the end of Hamas rule in Gaza.

French Foreign Minister Jean-Noel Barrot said on Friday that recognizing a Palestinian state at the conference would have been a "symbolic" decision and said they had a "particular responsibility" as a permanent member of the UN Security Council not to do so without the support of allies.

Kenneth Roth, former Executive Director of Human Rights Watch, expressed concerns that the recognition of a Palestinian state could end up being indefinitely delayed by the announced steps.

"Those steps should not be an endless (nonexistent) 'peace process' but pressure on Israel to stop obstructing a state," he wrote on X (formerly Twitter).

Although 147 countries recognize the state of Palestine, much of Europe has been reluctant and long stated that such a move could only come with Israel's approval and reciprocal moves from Arab states.

Ireland, Spain and Norway recognized a Palestinian state last year, and there has been an increasing consensus that recognition should come unilaterally as a means of pressuring Israel to change tack.

Last week, Israeli diplomat Alon Pinkas told Middle East Eye (MEE) that France's push to recognize Palestine was "serious and has the backing of most of the European Union and Saudi Arabia”.

However, both Britain and France have faced pressure from the United States over the plans, while Israel has said it would expand its settlements in the occupied West Bank in response.

Israeli war minister Israel Katz said plans to build a further 22 settlements in the occupied territory were "a strategic move that prevents the establishment of a Palestinian state".

In July last year, the Israeli parliament voted overwhelmingly to oppose the establishment of a Palestinian state, with only Palestinian lawmakers and a single left-wing Jewish MP voting in support.

Pinkas told MEE that while there was no meaningful domestic support in Israel or the parliament for Palestinian statehood, the international community’s pitch to Israel over ending the war should be that “we are your friends, we want you to succeed, this cannot go on... Netanyahu is driving you to unmitigated and irreparable disaster. Wake up, we are here to help".