Investors Bank on No-Frills Pakistan Budget to Keep Rally Alive

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(Bloomberg) — Investors in Pakistan are hoping Tuesday’s budget stays focused on slashing spending, boosting revenues, and reinforcing the government’s commitment to its International Monetary Fund loan program.

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A no-frills expenditure plan would offer a much-needed reassurance to markets that the government will follow through on its promises to the IMF. The KSE-100 Index hit a record high last week, and the country’s dollar bonds logged their biggest monthly gain in over a year in May, signaling investors expect minimal surprises on spending and taxes.

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Pakistan’s assets have been among the world’s top performers over the past two years, thanks to IMF’s support, improving company earnings and steep interest rate cuts by the State Bank of Pakistan. But momentum has cooled in recent months as geopolitical tensions with India and the threat of US tariffs clouds the outlook. 

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“As long as there’s broad confidence that they are sticking toward the consolidation program, bonds will continue to perform reasonably well,” said Thys Louw, portfolio manager at Ninety One in London. “The budget might lack a bit of punch, but it’ll need to stray very far from IMF demands to get the market very disappointed.” 

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The KSE-100 Index has risen 6% this year, following gains of 84% and 54% in 2024 and 2023, respectively. Meanwhile, the country’s dollar bonds have returned 7% in 2025, compared with about 30% during the same time period last year. 

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Finance Minister Muhammad Aurangzeb has said he would unveil a “strategic” economic plan in parliament on Tuesday, featuring measures aimed at ending reliance on IMF bailouts and friendly state support. Key initiatives include reducing the primary surplus to 1.6% of GDP by cutting subsidies, adjusting energy tariffs, and introducing tax on farm income, following a $2.4 billion financing agreement with the Washington-based lender last month.

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To be sure, the government has cut allocations on development projects slightly to 1 trillion rupees ($3.4 billion) for next year. Experts also expect defense spending to rise in the backdrop of tensions with India, with whom it came to the brink of full-scale war last month.

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Still, Neuberger Berman is continuing to hold the country’s short-end dollar bonds, and Ninety One is similarly betting on Pakistan’s shorter-dated notes, where the return potential can be “reasonably high,” said Louw. The government’s efforts to adhere to the IMF’s program, underscored by the recent $1 billion disbursement, have boosted confidence.

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“We’re quite optimistic for the second half of the year, and believe the market has room to revalue,” said Mattias Martinsson, partner and chief investment officer at frontier-market specialist Tundra Fonder. “I would say that there is low likelihood that we will have negative surprises” in the budget, he said.

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—With assistance from Chiranjivi Chakraborty.

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