South Asia Faces Inflation Pressures from Regional Conflict and Weather Disruptions

Finance Minister Muhammad Aurangzeb unveiled Pakistan's federal budget for FY2026-27 on Friday, targeting Rs660–700 billion in fresh tax measures and an 18% increase in overall tax revenues to meet IMF fiscal targets under a three-year, $7 billion lending package. Total planned spending stands at 18.77 trillion rupees, with defence spending rising 16% while development spending remained broadly flat; the National Economic Council set the combined federal and provincial development budget at Rs3.218 trillion, trimming earlier plans by over Rs1 trillion, with Punjab's development allocation cut by nearly half. Significant income tax relief is planned for salaried individuals earning between Rs230,000 and Rs341,000 per month, though those earning between Rs100,000 and Rs183,000 are unlikely to see changes. The budget is being presented against a backdrop of sharply rising inflation driven partly by the ongoing Middle East conflict: Pakistan's average inflation jumped to 10% in the three months after hostilities began, up from 5.5% earlier in the fiscal year, and petrol prices have surged more than 40%. GDP growth for the current year is projected at 3.7%, below the 4.2% target, while the government forecasts 4% growth and 8.2% inflation for the coming fiscal year. Outside parliament, government employees protested over salaries and pensions, while inside, opposition lawmakers disrupted the finance minister's address, and small traders publicly criticised the new Fixed Tax Asaan Scheme targeting businesses with turnover up to Rs200 million.