Pakistan’s federal government has reached a broad fiscal agreement with Punjab and Sindh to cut development spending and other expenditures as policymakers scramble to create space for the 2026-27 budget amid mounting financial pressures.
The breakthrough came ahead of a crucial meeting of the National Economic Council (NEC), the country’s highest economic decision-making forum, which is expected to finalise federal and provincial development plans for the next fiscal year.
The budget is now expected to be presented in parliament on June 12 after President Asif Ali Zardari summoned sessions of the National Assembly and Senate. Parliamentary Affairs Minister Tariq Fazal Chaudhry also indicated that lawmakers would likely receive the budget on Friday.
According to informed sources, the federal government and provinces have agreed to jointly cover an estimated Rs800 billion revenue shortfall this year. They also plan to generate additional fiscal space next year to meet what officials described as “strategic needs”.
Under the agreement reached between the Pakistan Peoples Party and Pakistan Muslim League-Nawaz, provincial shares from the federal divisible pool will remain frozen at current levels. The Centre will retain any increase in Federal Board of Revenue collections beyond this year’s revenue base.
Sources said the arrangement would operate through an ad hoc mechanism. The federal government would first transfer full provincial shares before provinces return the additional amount to the Centre.
Officials estimate that the amount could range between Rs1.3 trillion and Rs1.7 trillion next year, depending on actual FBR revenue collection.
Development Plans Face Major Cuts
To facilitate the arrangement, Punjab and Sindh have agreed to reduce their annual development programmes and curb other expenditures.
Khyber Pakhtunkhwa and Balochistan have not yet joined the agreement. The KP government continues internal consultations on whether to participate in the NEC meeting.
Reports also surfaced during negotiations about removing customs duties from the National Finance Commission divisible pool. Officials examined the proposal as a way to create additional fiscal space for the federal government.
The idea could have generated nearly Rs1 trillion for the Centre. However, negotiators ultimately dropped the proposal because of its political and constitutional implications.
PPP leader and former finance minister Saleem Mandviwalla confirmed that an agreement had been reached.
“There was disagreement on procedures which has been settled now,” he told Dawn.
He added that the Centre and provinces would jointly cover any fiscal requirement that emerges next year.
“Whatever the requirement may be, it would be jointly covered by the Centre and the provinces,” he said.
Mandviwalla also dismissed reports about excluding customs duties from the divisible pool.
“The idea of excluding customs duty from the divisible pool was ‘nonsense’ and stood nowhere now,” he said.
He maintained that authorities would create fiscal space through expenditure adjustments rather than new taxation measures.
NEC Set to Revise Rs4.7 Trillion Development Portfolio
The agreement is expected to trigger significant reductions in planned federal and provincial development spending.
Officials had earlier proposed combined development programmes worth Rs4.715 trillion for 2026-27. These included a federal Public Sector Development Programme of Rs1.126 trillion and provincial development plans worth Rs3.138 trillion.
Punjab had proposed an ADP of Rs1.45 trillion. Sindh earmarked Rs816 billion. KP planned Rs564 billion, while Balochistan proposed Rs308 billion.
Sources said the NEC will likely revise these figures downward to accommodate fiscal constraints.
In return for supporting the agreement, PPP reportedly secured increased federal funding for the long-delayed Sukkur-Hyderabad Motorway project. The allocation could rise from Rs20 billion approved by the Annual Plan Coordination Committee to around Rs70 billion.
The NEC meeting, chaired by Prime Minister Shehbaz Sharif, will review the Annual Plan 2025-26, approve the Annual Plan 2026-27 and examine key socio-economic indicators. Participants will also review public sector investments, provincial development programmes and progress on projects approved by national planning bodies.
The decisions taken this week will shape Pakistan’s fiscal strategy as the government seeks to balance development spending with growing financial obligations and revenue challenges.
