By Staff Reporter
KARACHI: Pakistan’s Rs18.77 trillion federal budget for the fiscal year beginning in July won a qualified endorsement from Fitch Ratings on Tuesday, with the agency crediting Islamabad’s sustained commitment to fiscal discipline under its $7 billion International Monetary Fund program while warning that the country’s most ambitious revenue targets yet remain vulnerable to the same structural weaknesses that have long plagued its tax administration.
The budget — which targets 4% economic growth, inflation of 8.2%, and a primary surplus of 2% of gross domestic product — marks Islamabad’s latest bid to anchor a fragile recovery on IMF-led reform. Fitch said the fiscal trajectory is credible in the near term, but projected outcomes are more cautious than the government’s own figures, citing risks that have derailed similar programs in the past.
“Pakistan’s budget for the fiscal year ending 30 June 2027 maintains a clear commitment to fiscal discipline under the IMF Extended Fund Facility, by targeting a primary surplus of 2% of GDP and an overall deficit of 3.6% of GDP.”
The agency pointed to a stronger-than-expected FY26 performance as a foundation for cautious optimism. Pakistan is on track to post a primary surplus of 2.5% of GDP for the current fiscal year, ahead of earlier projections, driven by aggressive cuts to public spending and a provincial surplus of 1.1% of GDP. Fitch said the result exceeded its own expectations.
The revenue problem
The central challenge facing Islamabad in FY27 is a tax revenue target that would, if met, represent a record for Pakistan — 10.6% of GDP, building on improved collection in the current year. But federal tax collections in FY26 are officially projected to fall 0.7 percentage points of GDP short of their own target, a shortfall that Fitch said underscores how difficult it has historically been to meet ambitious goals.
Achieving the primary surplus, Fitch said, will depend on sustained revenue outperformance relative to historical trends — a bar it characterized as “challenging” given structural weaknesses in tax administration and what it described as a “limited pipeline” of new tax measures. Non-tax revenues, including profit transfers from the State Bank of Pakistan, are set to decline in the coming year, compressing one cushion Islamabad has leaned on previously.
The reliance on provinces adds another layer of risk. Finance Minister Muhammad Aurangzeb said last week that Islamabad intends to draw on a portion of provincial funds to help finance its expanded defense requirements. But Fitch flagged historical variability in provincial fiscal performance and the coordination challenges between the federal government and the four provinces as a source of uncertainty that could upset the overall consolidation calculus.
Defence up, capex squeezed
Pakistan raised defense spending by roughly 18% in the new budget, to $10.8 billion, a politically significant increase that comes as Islamabad navigates ongoing regional tensions. The increase also reflects Aurangzeb’s decision to tap provincial funds as a partial financing mechanism.
The expansion of defense outlays stands in contrast to continued compression elsewhere. Fitch warned that the pattern of fiscal consolidation in Pakistan — heavily reliant on cuts to capital expenditure rather than revenue gains — carries real costs. While expenditure compression has delivered short-term deficit reduction, persistently low capital spending risks weighing on medium-term growth, limiting future revenue mobilization, and complicating the country’s debt trajectory.
“The scope for further reductions is narrowing, heightening the trade-off between fiscal adjustment and growth as spending pressures rise from a suppressed base
Interest burden towers above peers
Perhaps the starkest metric in Fitch’s assessment concerns Pakistan’s interest costs. The country’s large stock of short-maturity domestic debt, combined with high market yields, keeps interest payments structurally elevated. The FY27 budget projects an interest-to-revenue ratio of 39.1% — more than three times the 12.1% median for Pakistan’s B-rated sovereign peers. That gap limits the government’s fiscal flexibility and crowds out priority spending on health, education, and infrastructure.
The risk is compounding. If global energy prices rise and domestic inflation accelerates, the central bank may be forced to raise its policy rate, pushing interest costs higher still and potentially breaching the government’s overall deficit ceiling of 3.6% of GDP — already above the 3% median for B-rated sovereigns.
Fitch maintains Pakistan’s sovereign rating at B-minus with a stable outlook. The FY26 fiscal performance and the government’s demonstrated willingness to sustain the IMF program have stabilized the near-term picture. But the agency’s language leaves little doubt about the distance Islamabad still has to travel: the budget is a commitment, not a guarantee, and the gap between ambition and execution in Pakistan’s tax system remains the single largest variable in the country’s fiscal path forward.
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