Aurangzeb sees upside to FY27 outlook after US-Iran deal, says too premature to revise projections

ISLAMABAD: Finance Minister Muhammad Aurangzeb has said Pakistan may see an improvement in its economic outlook for fiscal year 2026-27 after the agreement between the United States and Iran to end the fighting, but cautioned that it is too soon to make changes to the budget projections.

Speaking to Reuters hours after the US and Iran signed the deal, Aurangzeb said the conflict had pushed inflation back into double digits and that damage to energy facilities meant supply chains would not normalise immediately. He said the government had been assessing the wider effects if the conflict continued.

“We were looking at how we manage the second, third-order impact in case this conflict continues,” he said. “The energy infrastructure has been hit. And therefore, it will take time before we return to normalcy in terms of supply chains.”

Aurangzeb added that there could be positive implications for the coming year’s projections, but said revising the budget at this stage would be premature.

“I do see upsides in what we have projected for next year,” he added, but cautioned it would be “way too premature” to revise the budget.

The budget for the next financial year, presented in parliament on Friday, sets a growth target of 4 per cent and inflation at 8.2 per cent. It also increases defence spending by 18 per cent to Rs3 trillion, while counting on stronger tax collection to keep Pakistan’s $7 billion International Monetary Fund programme on course.

Borrowing plans and creditor mix

The finance minister also said Islamabad could turn to commercial borrowing in FY27 to alter the composition of its creditors without adding to the country’s total external debt.

“Ideally, what we want to do is to see if we can replace some of the bilateral through commercial,” he said. “We do not intend to increase the size of our external debt.”

According to Aurangzeb, Pakistan repaid $3.4 billion in bilateral deposits to the United Arab Emirates last month, while also obtaining financing from commercial banks in the UAE, a move that reflects the shift in creditor profile the government wants to formalise.

He said Pakistan is planning additional Panda bonds, Eurobonds, US dollar issuances and its first rupee-linked, dollar-settled instruments, though their size has not yet been determined. The FY27 budget projects $2.82 billion in commercial and Eurobond financing. Pakistan also has approval for Panda bonds worth the equivalent of $1 billion after its $250 million debut issue, which was 95 per cent backed by the Asian Development Bank and the Asian Infrastructure Investment Bank.

Defence exports and digital assets

Aurangzeb said it was still too early to estimate any benefit to defence exports, despite increased interest in Pakistan’s defence industry after last year’s conflict with India. He said the government’s immediate priority remained budgetary allocations, given the country’s two active borders with Afghanistan and India.

On digital assets, the minister said the government has moved this year to formalise the sector, including through agreements with Binance and World Liberty Financial. He said Pakistan would first put in place regulation for crypto, tokenisation and digital-asset exchanges before moving to tax the sector, adding that revenue would come after formalisation.

“Yes, at some point we have to bring it into the taxation timeframe,” he added. “But this was not the time to do it.”