Pakistani business leaders see budget tax cuts as catalyst for 4% growth and export revival

ISLAMABAD: Pakistani business leaders and investors said Saturday that the tax relief measures announced in the Federal Budget 2026-27 could help the government meet its 4 percent economic growth target and strengthen exports, provided energy costs become more competitive.

Pakistan unveiled a Rs18.8 trillion ($67.5 billion) annual fiscal plan on Friday, increasing defense spending and setting ambitious revenue targets as the government works to sustain an International Monetary Fund-backed recovery amid regional tensions and pressure on public finances.

Business leaders from the Federation of Pakistan Chambers of Commerce & Industry (FPCCI) welcomed the incentives, including lower transaction taxes for the housing and construction sectors, as well as measures intended to improve agricultural productivity.

“The government’s targets will be fulfilled. Our exports, which have stopped growing for the past four years, will increase. This is a very big incentive,” FPCCI President Atif Ikram Sheikh told Arab News on Saturday.

“The industry will run, employment will increase, and revenue will be generated.”

Islamabad aims to expand the economy by raising exports to $32.9 billion and keeping imports at around $70 billion in the next fiscal year, according to budget documents.

The new fiscal plan reduced advance income tax and the minimum tax on exports from 2 percent to 1.25 percent. It also abolished the 1-7 percent “super tax” on six income slabs for medium-sized businesses earning between Rs150 million ($539,209) and Rs500 million ($1.8 million) annually.

The government also announced plans to build 150,000 affordable and climate-resilient housing units across Pakistan under its sustainable urban development program.

To encourage construction activity, withholding tax on property transfers has been reduced from 2.5 percent to 1.25 percent for buyers and from 5.5 percent to 2.75 percent for sellers.

Other measures include a 4.5 percent cut in withholding tax on international transactions made through bank credit and debit cards, the abolition of capital value tax on foreign assets, and a fixed Rs25,000 tax for retailers with annual sales of up to Rs200 million ($718,945).

Asked which measure was the most significant, Sheikh highlighted the construction package.

“The biggest package is construction. Sixty industries are allied to it. All those industries are [currently] closed. Steel, cement, tiles, ceramic, I don’t know what else. So, all those will start running,” he said.

The FPCCI chief said exports could exceed the government’s target if energy costs were addressed effectively.

According to global fuel price tracking data shared by the country’s energy ministry last month, Pakistan recorded the world’s second-highest surge in domestic fuel prices since the start of the United States-Iran war, which disrupted global cargo and energy supplies passing through the Strait of Hormuz. Petrol and diesel prices in Pakistan rose by 56 percent at one point.

The increase was second only to Myanmar’s 90 percent rise and was far higher than hikes in the United States, Britain and several regional countries. The government has since announced multiple fuel price reductions amid a ceasefire and ongoing negotiations between the US and Iran to end the war.

“If the energy price becomes competitive, then we can do $40 billion or even $80 billion in exports,” said Sheikh, who described the government’s 4 percent growth target as achievable despite regional tensions.

“I think we will achieve that.”

Investors also responded positively to the tax relief package.

“I think the relief that they have given is, firstly, the super tax relief is a very good relief which is positive for small businesses,” Mohammad Shoaib, chief executive officer of Lucky Investment Ltd., which manages Rs125 billion ($449 million) in assets, told Arab News.

“Secondly, there is a lot of focus on exports. They have given benefits to the exporters. Thirdly, they have given some benefits to the real estate sector to stimulate the construction sector,” he said.

“All in all, all three small things together have a positive impact. It will have a positive impact on growth.”

However, Shoaib cautioned that 4 percent growth would not be enough to resolve Pakistan’s long-term economic challenges.

“You need to grow from 6-7 percent for the next 5-10 years to improve the living standard of the people and to grow the economy,” he said.

Still, the Lucky Investments Ltd. CEO said the budget reflected a “positive approach in difficult circumstances.”

Amreen Soorani, head of research at Al-Meezan Investments Management Limited, Pakistan’s largest Shariah-compliant mutual fund with more than Rs700 billion ($2.5 billion) in assets, said the government had targeted sectors with strong potential to support growth.

“While the 4 percent growth target is certainly ambitious given regional tensions and trade disruptions at the Afghan border, the budget strategically fuels areas that may deliver,” she said.

“By locking in major tax breaks for the booming IT sector, slashing super taxes for corporate exporters, and easing the tax burden on salaried professionals, the government seems to give a path for private sector expansion to some extent.”

Pakistan’s trade with Afghanistan has been suspended for months amid heightened tensions and sporadic cross-border skirmishes between the neighbors over a surge in militancy in Pakistan’s western regions bordering Afghanistan.

Soorani said the proposed tax relief might not directly drive economic growth, but it could help keep “the economic wheel” moving.

“We might not deviate much from the [4 percent growth] target,” the economist added.

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