Pakistan’s latest budget keeps the country’s fiscal repair efforts on track, but Fitch Ratings believes maintaining that momentum will become more difficult as some of the factors that supported last year’s performance begin to fade.
In its latest assessment, the ratings agency said Pakistan delivered a better than expected fiscal outcome in FY26, with the overall budget deficit narrowing to an estimated 3.0 percent of GDP. The result was supported by a record primary surplus of 2.5 percent of GDP, marking a significant improvement in the country’s public finances.
Fitch, however, said the stronger numbers were not driven entirely by lasting reforms. Lower borrowing costs after interest rate cuts reduced the government’s debt servicing bill, while unusually high profit transfers from the State Bank of Pakistan provided a temporary boost to revenues. At the same time, lower than planned development spending helped contain the deficit despite tax collections falling short of target.
For FY27, the agency expects Pakistan to continue on a relatively disciplined fiscal path, although it does not expect the government to fully achieve its budget goals. It projects the overall deficit at 4.0 percent of GDP, slightly above the official target of 3.6 percent, while forecasting a primary surplus of 1.9 percent.
The biggest hurdle, according to Fitch, remains Pakistan’s narrow tax base. Even after recent efforts, tax revenue stands at just over 10 percent of GDP, one of the lowest levels among countries with similar credit ratings. The agency acknowledged the government’s push to improve tax enforcement and widen the tax net but said these measures are likely to produce results gradually rather than immediately.
It also warned that the government has limited room to make further spending cuts. Development spending has already been trimmed significantly and is expected to rise modestly this year, while social sector allocations remain protected under Pakistan’s IMF programme.
Although lower interest rates have eased pressure on public finances, debt servicing will still consume more than 40 percent of government revenue in FY27, leaving Pakistan with one of the weakest debt affordability indicators in its rating category.
Fitch also pointed to implementation risks at the provincial level, saying planned fiscal targets could be harder to achieve if provinces fail to deliver expected surpluses or delay reforms such as the agricultural income tax.
