Pakistan’s Defence Budget May Harm IMF Bailout Conditions

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China may Gain in Pakistan Defence Budget Hike with Threat to Economic Recovery

By TRH News Desk

NEW DELHI, June 11, 2025 – Pakistan risks inviting financial turmoil with steep hike of Defence budget. The decision to increase its defence budget by 18% to over Rs 2.5 trillion for the fiscal year 2025-26 may come in conflict with the conditions laid down by the International Monetary Fund (IMF) as part of the bailout package agreed earlier.

Pakistan observers noted that the defence budget hike affirms the nation being a security state. They also stated that Pakistan will have to significantly cut down spending on education and health, besides welfare to meet the demands of the defence sector.

The steep defence budget hike has come at a time when Pakistan is grappling with a debt-to-GDP ratio near 70%, dwindling foreign reserves, and heavy reliance on IMF bailouts.

Safiya Aftab, an Islamabad-based economist, told DW that the defence budget has got a “big hike and will have to be funded from somewhere. Of course, it will have implications for expenditure on the social sectors and on development schemes.”

Pakistan observers noted the tension between the country’s security imperatives and economic fragility. According to Dawn, Pakistan’s Planning Minister Ahsan Iqbal justified the defence budget increase, citing heightened tensions with India following the April 22, 2025, Pahalgam terror attack and India’s subsequent Operation Sindoor, which targeted terrorist bases in Pakistan and Pakistan-occupied Kashmir.

Iqbal also pointed to India’s suspension of the Indus Waters Treaty as a contributing factor, framing the hike as a necessary response to external threats.

With political establishment in Pakistan backing the narrative of the Army, the defence budget hike was on the card. The Pakistani Army is now dictating terms with the political leadership, with the Army Chief Asim Munir calling shots and almost following in the footsteps of General Pervez Musharaff post-Kargil War with India.

“During the Kargil conflict, President Clinton’s intervention effectively rescued Pakistan from a military and diplomatic debacle. This emboldened Gen. Musharraf to stage a coup. Now, Trump’s shielding of Pakistan during India’s Operation Sindoor has led to a steep 20% increase in Pakistan’s military spending,” said security analyst Brahma Chellaney in a post on X.

He noted that “every US intervention in India-Pakistan tensions has ended up strengthening the Pakistan military at the expense of civilian authority. Following the latest intervention, the widely unpopular Gen. Asim Munir has not only rehabilitated his image but also promoted himself to the rank of Field Marshal.”

Pakistan’s The Express Tribune underlined that the IMF has imposed 11 new conditions on Pakistan’s bailout program, bringing the total to 50. These conditions include parliamentary approval of a Rs 17.6 trillion federal budget and reforms in agriculture income tax and energy sectors, added the outlet.

The newspaper underscored the IMF’s warning that escalating tensions with India could jeopardize Pakistan’s fiscal and reform goals, suggesting that the defence budget hike might complicate compliance with these stringent requirements.

The defence budget allocation, which accounts for nearly 18% of the federal budget, dwarfs investments in education (2% of GDP) and healthcare (1.3% of GDP), highlighting a persistent prioritization of security over social welfare.

Experts also noted that Pakistan’s fiscal choices may push it closer to China, potentially complicating its engagements with Western financial institutions like the IMF.

Pakistan’s defence budget hike poses significant risks to its ongoing $7 billion IMF bailout program, approved in September 2024, and the recently secured $1 billion tranche under the Extended Fund Facility (EFF). The IMF has repeatedly flagged Pakistan’s high debt levels, low reserve buffers, and reliance on external financing as critical vulnerabilities.

The allocation diverts resources from social spending and economic reforms, which are central to the IMF’s agenda. Pakistan may end up spending on imports from China on defence goods, which may not help revive the local economy. With the Pakistani economy likely to grow at lower than 3% in the current fiscal, Pakistan may stare at dwindling foreign currency reserves and deepening of the economic crisis, noted experts.

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