Each year, as April arrives, a flurry of activity surrounds the preparation of the federal and provincial budgets. Experts, politicians, media commentators, and concerned citizens begin offering recommendations to the government – suggesting where to spend, where to cut, and how to reform. However, before engaging in this exercise, one critical question must be answered: Who actually prepares the budget, and who holds the real authority to decide how public funds are allocated?
The textbook answer would point to the Ministry of Finance at both the federal and provincial levels. Constitutionally, it is indeed these institutions that compile and present the budget. But in reality, the ministry has surprisingly limited control over most major budgetary components.
Let us examine the reality. The most prominent portion of the budgetary allocation is dedicated to debt servicing – specifically, the payment of interest (markup) on public debt. In the current fiscal year, 57% of current expenditures in the federal budget have been allocated for this purpose. This proportion is not determined by the Ministry of Finance, Parliament, or any elected body; rather, it is dictated by the monetary policy decisions of the State Bank of Pakistan (SBP). If the SBP decides to raise interest rates, the cost of servicing debt increases proportionally. The government, in turn, is compelled to allocate more funds to debt servicing, with no mechanism to resist or override the central bank’s decision. If the SBP raises the interest rate such that markup payments increase from 57% to, say, 65% or even 70% of the budget, the government simply has to comply. No debate, no votes – just a binding obligation.
The second major portion of the budget is the provincial share, which is transferred to the provinces under the National Finance Commission (NFC) Award. This share is decided by a formula agreed upon by all federating units and the federal government, and once finalized, it cannot be changed unilaterally. The federal government is legally and constitutionally bound to release the agreed amount, further reducing its fiscal space.
Another large and largely inflexible budgetary component is defense spending, which currently accounts for around 13% of the federal budget. The overall trend in defense spending grows in tandem with the size of the budget, while minor adjustments are allowed under pressure to reduce its share. Consequently, defense spending as a proportion of the federal budget has consistently declined over time.
The civil government’s operational expenses, such as salaries and administrative costs, form another significant chunk of the budget. Due to fixed salary structures, inflation adjustments, and institutional commitments, these expenditures must also increase with the overall budget, leaving the government with very limited ability to intervene. Similarly, allocations for pensions and grants to autonomous institutions are also fixed in nature.
Provincial governments suffer an even worse fate. Their budgets are heavily dependent on federal transfers through the NFC Award. With minimal own-source revenues and no monetary tools, their discretion is largely limited to development projects-many of which are funded or capped by the federal government anyway. In regions like Azad Jammu and Kashmir, development budgets are issued as fixed grants, rendering local budgeting exercises almost ceremonial.
This means that almost the entire budget is pre-committed, with no significant room for reallocation or innovation. The only segment where the government can exercise some discretion is the Public Sector Development Program (PSDP) – commonly known as the development budget. Yet, even here, practical limitations restrict the government’s actions. Historically, governments have failed to fully utilize even the modest amounts allocated for development, often slashing spending midway through the fiscal year due to revenue shortfalls or rising debt-servicing needs.
In reality, the most influential actor in determining fiscal outcomes is not the Ministry of Finance, but the State Bank of Pakistan. The SBP’s control over the interest rate effectively dictates how much of the national budget must be reserved for interest payments. The SBP uses its discretion to increase allocations for markup payments disproportionately-with no questions or objections from any quarter. For instance, during FY 2022-23, Pakistan’s domestic debt increased by about 20%, but markup payments in the subsequent year surged by 87%. More recently, in FY 2023-24, debt grew by 20%, but markup increased by 36%. Overall, from 2018 to 2025, public debt increased by 200%, while markup allocations ballooned by 500%.
Higher interest rates not only bloat the government’s debt-servicing obligations but also directly influence a wide array of economic decisions and outcomes. The interest rate determines budget deficits, the cost of doing business, the cost of subsidies on concessional loans, unemployment levels, economic growth, and inflationary pressures. Despite causing profound ripple effects across the economy, the SBP continues to operate in an accountability vacuum. No institutional mechanism exists to evaluate the effectiveness or public costs of its decisions.
In the current fiscal year, the allocation for debt servicing stands at Rs. 9.8 trillion. Yet, there is no independent financial audit or technical scrutiny of how these funds are spent or justified. Even more troubling is the fact that recent legislative changes have formally exempted the SBP from legal accountability, placing it beyond the reach of parliamentary, judicial, or audit institutions. This creates an outrageous contradiction: Under PPRA rules, a public servant can be questioned for making a procurement decision of just a few thousand rupees without proper documentation, yet no such rules apply to the Rs. 9.8 trillion interest payments dictated by the SBP.
The SBP increases interest rates, arguing that such a move is intended to reduce inflation. But in reality, higher interest rates lead to higher markup payments. To finance these payments, the government must increase taxes and reduce subsidies, which increase inflation instead of reducing it. Furthermore, higher interest rates raise borrowing costs, restricting new startups, limiting business expansion, and increasing financial burdens on existing businesses – all of which add to inflation rather than curbing it.
Adding insult to injury, SBP leadership has increasingly been filled by individuals from commercial banking backgrounds. These appointees often have little experience in central banking or macroeconomic policy. More importantly, they are accustomed to thinking in terms of profits – not public welfare. This is a textbook conflict of interest, as commercial banks directly benefit from high interest rates and large government borrowings. Allowing such individuals to set monetary policy is akin to appointing pharmaceutical executives to lead drug regulation.
This discussion helps determine who really makes the federal budget. If more than half the budget is determined by the SBP’s interest rate decisions, and if the remainder is pre-committed to defense, salaries, and provincial transfers, then the Ministry of Finance is effectively managing crumbs. The real budget-makers are those who set the monetary framework – primarily the SBP. The true power lies with institutions like the State Bank of Pakistan, whose unchecked authority shapes fiscal outcomes, economic growth, and the lives of millions – without being held accountable.
And yet, they are not answerable to the people, to Parliament, or even to financial regulators. This lack of clarity and accountability makes all our pre-budget discussions, seminars, and policy dialogues performative at best, and misleading at worst.
Before we suggest any adjustments to the budget, we must demand the return of budgetary power to elected forums – those who should be answerable to the public. Such decisions should not lie with a body that is unaccountable to constitutional institutions. Power must be returned to those who are answerable – through constitutional reforms.
