By Staff Reporter
KARACHI: Pakistan’s fiscal deficit narrowed to the smallest in more than two decades in the year through June, as record fuel levy collections, a surge in cash transfers from provincial governments and a sharp drop in debt-servicing costs offset a shortfall in tax revenue and rising civilian administrative costs.
The shortfall between spending and revenue fell to 2.6% of gross domestic product in the fiscal year ended June 30, the lowest level since fiscal 2003, according to a report on fiscal operations published by the Ministry of Finance. The primary balance — a measure of the budget gap that strips out interest payments — swung to a surplus of 2.9% of GDP, the widest since the government began tracking the metric in fiscal 2020.
The improvement came even as the cost of running civilian government operations breached 1 trillion rupees for the first time, and despite a nearly 11% shortfall in Federal Board of Revenue collections against target, underscoring how much of the fiscal gain was driven by one-off and structural factors rather than a broad-based improvement in tax administration.
Petroleum levy collections jumped 29% to 1.567 trillion rupees from 1.22 trillion rupees a year earlier, exceeding both the original budget target of 1.468 trillion rupees and a revised goal of 1.498 trillion rupees set during the fiscal 2027 budget process. The increase came as consumer fuel prices climbed to records following US and Israeli strikes on Iran, which pushed global energy markets higher over the period. The levy figure excludes an unspecified amount of customs duty collected on petroleum imports and 26 billion rupees gathered through a separate carbon levy. For the current fiscal year, the government has set an even more ambitious target of 1.676 trillion rupees in petroleum levy collections, along with 50 billion rupees from a newly introduced climate levy on fuel products.
Debt-servicing costs, meanwhile, fell by nearly 2 trillion rupees, providing the single largest boost to the government’s finances. Interest payments dropped to 6.947 trillion rupees, or 5.5% of GDP, from 8.887 trillion rupees, or 7.7% of GDP, a year earlier — a decline of 2.2 percentage points of GDP in a single year. The drop tracked the central bank’s easing cycle, which brought the benchmark policy rate down to 10% from 22%.
Provincial governments contributed a record 1.45 trillion rupees in cash surpluses to the federal government, a 57% jump from 921 billion rupees in fiscal 2025 and above the 1.38 trillion rupees the provinces had committed to under Pakistan’s national fiscal pact. Punjab, the country’s most populous province, accounted for the bulk of the increase, transferring 915 billion rupees — roughly matching the combined surplus of all four provinces the previous year and up 163% from its own 348 billion-rupee contribution in fiscal 2025. Sindh’s surplus rose 24% to 350 billion rupees from 283 billion rupees. Khyber Pakhtunkhwa, governed by the opposition Pakistan Tehreek-e-Insaf, posted a surplus of 165 billion rupees, down about 6% from 176 billion rupees, while Balochistan contributed just 20.74 billion rupees.
Total government expenditure fell to 23.09 trillion rupees from 24.16 trillion rupees, pulling overall spending down to 18.2% of GDP from 21.1% a year earlier, largely on the back of the lower interest bill. Current expenditure declined to 16.3% of GDP, or 20.69 trillion rupees, from 18.8%, or 21.5 trillion rupees. Subsidies were cut by almost 22% to 1.01 trillion rupees from 1.3 trillion rupees, and development spending fell to 727 billion rupees from 786 billion rupees.
Defense spending rose 18% to 2.588 trillion rupees from 2.194 trillion rupees, pushing the category to 2% of GDP from 1.9%. The increase came after India carried out strikes that prompted additional military outlays, though the final figure exceeded the original budget allocation of 2.55 trillion rupees by only 38 billion rupees.
The cost of civilian government administration climbed 16% to 1.033 trillion rupees from 892 billion rupees, breaching the 1-trillion-rupee threshold for the first time and surpassing the 971 billion-rupee budget estimate, despite what the finance ministry described as ongoing restructuring and austerity measures.
Total revenue collection slipped to 15.6% of GDP from 15.7% a year earlier. The FBR, Pakistan’s tax authority, collected 13.01 trillion rupees, about 10% short of its target but up almost 11% from 11.74 trillion rupees in fiscal 2025.
The report also flagged a record statistical discrepancy of 853 billion rupees, more than double the 329 billion-rupee gap recorded in fiscal 2025 — a figure that had already drawn scrutiny from the International Monetary Fund, which proposed a technical mission to investigate the mismatch that the government declined. The finance ministry attributed 448 billion rupees of the latest discrepancy to under-reporting at the federal level, citing timing lags and book adjustments among the State Bank of Pakistan, the FBR and the Economic Affairs Division. The remaining 405 billion rupees was linked to the provinces, with 266 billion rupees tied to increases in commercial bank deposits; Khyber Pakhtunkhwa and Balochistan accounted for 95 billion rupees and 72 billion rupees, respectively, also largely reflecting bank deposit movements.
Pakistan’s fiscal deficit peaked at 8.9% of GDP in fiscal 2019 before falling to 8.1% and 7.1% in the following two years. It climbed back to 7.9% in fiscal 2022 but has narrowed steadily since, as the country has pursued successive rounds of fiscal tightening under IMF-backed programs. The primary balance remained in deficit until fiscal 2024, when it turned to a surplus of 0.9% of GDP, before improving to 2.4% in fiscal 2025 and 2.9% in the latest year.
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