Structural Reforms and Subsidy Shift
In a critical move to secure its economic program, Pakistan has assured the International Monetary Fund (IMF) it will pass on international oil price increases directly to consumers. This commitment comes alongside a major reform to develop targeted subsidy mechanisms aimed at protecting vulnerable populations from the resulting financial shock. The government has deferred a planned hike in the Federal Excise Duty (FED) on fertilizers and pesticides, citing global volatility and the strategic importance of the agricultural sector.
Major Boost to Social Protection
Central to the new reform benchmarks is a significant expansion of the Benazir Income Support Programme (BISP). To mitigate the impact of rising fuel and food prices—exacerbated by geopolitical conflict in the Gulf—the unconditional cash transfer (Kafaalat) will increase from Rs14,500 to Rs19,500 monthly, effective January 2027. This adjustment is designed to bring the benefit closer to 15% of the lowest income quintile’s consumption basket. The government has pledged to continue inflation adjustments beyond FY27 to preserve the benefit’s real value.
Further expansions include:
- Adding 200,000 households to the Kafaalat program by end-FY26, reaching 10.2 million households total.
- Increasing enrollment in conditional cash transfers for health and education by 700,000 to 11.4 million beneficiaries.
- Growing the Nashonama nutrition program by 200,000 to 2.2 million beneficiaries.
- Launching a new conditional cash transfer program for skills development in FY27.
Digital Transformation of Welfare
The government is accelerating the digitalization of welfare payments to improve efficiency and transparency. E-wallets have been created for 7 million Kafaalat families, with SIM cards distributed to those with mobile phones. Authorities aim to secure digital wallets for all remaining beneficiary families by the end of FY26, enabling fully digital disbursements starting in the fourth quarter. Work is also underway with the State Bank of Pakistan to implement interoperability among banks used by beneficiaries.
Inflation Hits 18-Month High
These policy assurances come as Pakistan faces mounting economic pressure. Official data shows inflation surged to 7.3% year-on-year in March 2026, breaching the central bank’s target band of 5-7% for the first time in months and marking the highest rate since August 2024. The spike is largely attributed to supply disruptions in the Strait of Hormuz, which drove a sharp increase in fuel and energy prices.
Key inflation drivers for March included:
- Transport costs skyrocketing to 12.5% from 0.4% the previous month.
- Housing and utilities climbing to 11.5%.
- The Wholesale Price Index leaping to 6.7%, signaling further consumer price pressures ahead.
Government Strategy and Expert Warnings
Prime Minister Shehbaz Sharif has directed authorities to formulate a comprehensive strategy to shield the economy and public from regional volatility, stressing that supply and demand balances must not be disrupted. He noted that Pakistan has so far managed these challenges effectively.
However, analysts warn the situation remains precarious. Former finance ministry adviser Dr. Khaqan Najeeb emphasized that Pakistan must ensure timely pass-through of global fuel prices to contain fiscal imbalances, while replacing blanket subsidies with targeted support for vulnerable groups like motorcycle owners, farmers, and public transport users. He called for a demand conservation strategy and clear public communication to build buy-in for necessary adjustments, framing the crisis as one of the largest energy shocks in recent history.
Dr. Najeeb also stressed that this moment should accelerate longer-term reforms, including energy indigenization, strengthening rail freight, and developing oil pipeline infrastructure to enhance efficiency and security.
