Defence and Debt: The two Ds that are draining Pakistan’s economy

Pakistan’s recently unveiled federal budget for the fiscal year 2025–26 reveals a sharp contradiction at the heart of its economic priorities: an aggressive increase in defence expenditure on one hand, and staggering debt obligations on the other.

While overall government spending has been reduced by 7 per cent, the defence allocation has been raised by 20 per cent, reaching 2.55 trillion Pakistani rupees (around $9 billion).

This increase places the defence sector as the second-largest component of Pakistan’s annual spending, behind only debt servicing, which will absorb Rs 8.2 trillion.

The defence allocation represents 14.5 per cent of the total federal outlay of Rs 17.57 trillion ($62 billion), while debt payments account for nearly 47 per cent, highlighting the extent to which both sectors dominate the financial landscape.

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Despite this defence hike, Islamabad’s military budget still pales in comparison to that of India, which has allocated over $77 billion for its defence forces this fiscal year.

Pakistan’s first D: Debt

The Pakistan Economic Survey 2025, released days before the budget, shows that the country’s total public debt has soared to a record Rs 76 trillion ($269 billion).

This figure includes Rs 51.5 trillion in domestic debt and Rs 24.5 trillion in external obligations. In just four years, the public debt has nearly doubled, rising from Rs 39.8 trillion in 2020–21, and growing more than five times over the past decade, when it stood at Rs 17.3 trillion.

The government itself admits the seriousness of this trend. “Excessive or poorly managed debt can pose serious vulnerabilities, such as rising interest burdens and can undermine long-term fiscal sustainability and economic security if left unaddressed,” the survey warns.

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The burden is not only financial but reputational. Pakistani Prime Minister Shehbaz Sharif has acknowledged how dependent Pakistan has become on external aid: “Today, when we go to any friendly country or make a phone call, they think that we have come to them to beg for money.”

In another moment of candour, he earlier said, “Even small economies have surpassed Pakistan, and we have been wandering for the past 75 years carrying a begging bowl.”

IMF bailouts & Pakistan

Pakistan’s fiscal balancing act continues under the watchful eye of the International Monetary Fund, which recently disbursed $1.03 billion under the Extended Fund Facility.

The IMF’s conditions have imposed strict limits on spending, requiring measures such as cutting subsidies, increasing tax revenue and restructuring public sector entities.

Despite a slight reprieve in the cost of borrowing, following interest rate cuts, analysts are sceptical that monetary policy alone can revive investor confidence. Fiscal constraints and structural bottlenecks remain formidable.

The government projects a 4.2 per cent GDP growth rate for 2025–26, compared to the expected 2.7 per cent growth in the current year. However, this is still well below regional trends. South Asia, according to the Asian Development Bank, grew at 5.8 per cent in 2024, and is projected to grow by 6 per cent in 2025.

Pakistan’s worsening poverty

While national leaders cite geopolitical necessity to justify defence spending, the social cost is increasingly difficult to ignore. According to recent data from the World Bank, nearly 45 per cent of Pakistan’s population now lives in poverty, and 16.5 per cent are classified as living in extreme poverty, following an upward revision of the international poverty line.

This year alone, 1.9 million more people fell into poverty, a trend attributed to economic stagnation, inflation, and reduced government support.

Economists argue that without redirecting resources to health, education, infrastructure, and job creation, the country will remain locked in a cycle of debt and underdevelopment.

With nearly two-thirds of the federal budget consumed by debt servicing and military expenditure, there’s little left for public welfare or growth-inducing investments.

Pakistan’s second D: Defence

The 20 per cent rise in the defence budget comes on the heels of a serious military confrontation with India in May.

Pakistani officials falsely claimed that during that episode, six Indian fighter jets were shot down using Chinese-supplied J-10C aircraft.

Highlighting Pakistan's false narrative, Sharif said, “After defeating India in a conventional war, now we have to surpass it in the economic field.”

Alongside the budget announcement, Pakistan confirmed that it had been offered significant military hardware from China — its most strategic defence and diplomatic partner.

These offers include 40 fifth-generation J-35 stealth fighter jets, KJ-500 airborne early warning and control aircraft, and HQ-19 ballistic missile defence systems.

The Pakistani government’s official social media post on June 7 described these offers as part of “several major diplomatic achievements,” which also included the deferment of $3.7 billion in debt by China.

The J-35 jets, developed by Shenyang Aircraft Corporation, were publicly showcased at the 2024 Zhuhai Airshow and would mark China’s first overseas sale of the fifth-generation aircraft.

The shares of Chinese defence companies surged following Pakistan’s announcement. AVIC Shenyang Aircraft Company saw its stock hit the 10 per cent daily trading limit in Shanghai, while Aerospace Nanhu Electronic Information Technology Co. shares rose by 15 per cent.

What the Pak budget breakdown reveals about actual military spending

While the defence budget stands at Rs 2.55 trillion, the full scope of military-related expenses is larger.

The budget also includes Rs 742 billion ($2.63 billion) for military pensions, bringing total defence-related allocations to approximately Rs 3.29 trillion ($11.67 billion). Within this, Rs 704 billion ($2.5 billion) is earmarked for equipment and physical assets.

This has raised concerns among economists, especially given the trade-offs. According to Reuters, the defence boost is likely to come at the cost of development spending, which has already been slashed.

Former finance minister Miftah Ismail commented, “Modernising our armed forces is essential. But the key is spending wisely.” He also criticised the government for not trimming bureaucratic excess, saying that it should reduce “excessive” salaries of civil servants and elected officials.

Pakistani finance Minister Muhammad Aurangzeb, who presented the budget in Parliament, framed the increase as necessary due to a “historic moment.”

He said the budget represents the beginning of a strategy to “change the economy’s DNA by bringing basic changes,” aimed at reversing economic stagnation and dependency.

He noted that reforms would include the privatisation of Pakistan International Airlines (PIA), a key demand by the International Monetary Fund, and efforts to improve export performance and foreign currency reserves.

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With inputs from agencies