ADB warns Pakistan’s ambitious FY2027 revenue target could squeeze fiscal space

September 23, 2026 (MLN): Pakistan’s fiscal strategy for FY2027 is aimed at supporting economic activity while maintaining fiscal discipline under the International Monetary Fund (IMF) program, but ambitious revenue targets and rising defense and interest costs could further narrow the space available for growth-enhancing spending, the Asian Development Bank (ADB) said.

In its July 2026 Asian Development Outlook, the ADB said Pakistan’s budget targets a consolidated fiscal deficit of 3.6% of gross domestic product (GDP) and an underlying primary surplus of 2.0% of GDP, in line with the targets set under the IMF’s Extended Fund Facility (EFF).

The fiscal strategy is centered on stronger revenue mobilization and selective expenditure containment. At the same time, the government has introduced measures intended to support economic activity, including revised income-tax slabs, a lower super tax, reduced property transaction taxes and lower tariffs on industrial inputs.

FBR revenue target remains challenging

The ADB said Federal Board of Revenue (FBR) collections are targeted to grow 17.6% in FY2027, taking FBR tax revenue to 10.6% of GDP from 10.2% in FY2026.

The target is expected to be supported by administrative measures, including the establishment of a National Faceless Center for automated audits and broader coverage of the retail sector.

According to the ADB, tax measures aimed at easing the burden on households and businesses could improve competitiveness, but their revenue impact will need to be compensated through stronger compliance and enforcement.

The bank described the FBR target as ambitious, pointing to revenue shortfalls in FY2025 and FY2026 that previously resulted in in-year expenditure adjustments.

Defense and interest costs to increase

Fiscal pressures are expected to rise in FY2027, with defense expenditure projected to increase 16% and interest payments facing upward pressure from a larger outstanding debt stock and higher policy rates following the Middle East conflict.

The ADB said lower power-sector subsidies and smaller provincial development programs are expected to provide some offset.

However, the bank noted that the decline in provincial development spending reflects a compression of provincial resources through a reverse transfer to the federal government under Article 164 of Pakistan’s Constitution, rather than a fundamental change in the government’s development priorities.

The ADB warned that failure to meet revenue targets could once again force the government to reduce expenditure during the fiscal year, further limiting the already narrow fiscal space for public investment that could support economic growth.

Fiscal deficit falls sharply in FY2026

Pakistan’s consolidated fiscal deficit declined to 2.6% of GDP in FY2026 from 5.4% in FY2025, while the primary surplus rose to 2.9% of GDP, exceeding the IMF EFF projection of 2.6%, according to the ADB.

The improvement was largely driven by lower interest costs rather than a substantial expansion of the tax base.

FBR collections grew 10.8% year-on-year in FY2026, a significant slowdown from 26.1% growth in FY2025, and remained around PKR969 billion below the EFF program benchmark.

FBR revenue as a share of GDP remained unchanged at 10.2%, pointing to limited progress in broadening the tax base.

Non-tax revenue reached 4.4% of GDP, supported by a 44.5% increase in Petroleum Development Levy collections and Rs2.428tr in State Bank of Pakistan profit transfers.

Lower interest payments strengthen fiscal position

Total government expenditure declined to 18.2% of GDP in FY2026 from 21.1% a year earlier, with interest payments falling to 5.5% of GDP from 7.7%.

The ADB attributed the decline in interest costs to lower interest rates and significant early retirement of domestic debt.

Non-interest current expenditure, however, increased in absolute terms, while defense spending rose 18%. Development expenditure increased marginally to 2.7% of GDP from 2.6%.

External financing access improves

Pakistan’s financial account showed improved sovereign standing and renewed access to international financing, the ADB said.

The government raised $750m through a Eurobond and $250m through a Panda bond during April-May 2026, indicating renewed access to international capital markets.

However, the proceeds did not fully cover Eurobond repayments of $500m in September 2025 and $1.4bn in April 2026, resulting in net portfolio outflows of $1.2bn.

The State Bank of Pakistan also rolled over several bilateral deposits that matured during the year, refinancing a significant portion of the maturing stock through fresh placements.

Multilateral and bilateral program disbursements, supported by the IMF’s EFF program, remained the primary source of external financing.

Reserves climb to $18.5bn

Pakistan’s gross international reserves rose to $18.5bn by the end of June 2026 from USD14.5 billion a year earlier, according to the ADB.

The increase lifted import cover to 2.9 months and contributed to improved sovereign credit assessments.

Pakistan also received sovereign rating upgrades from S&P in July and Moody’s in August, which the ADB linked to stronger external liquidity and renewed access to financing.

The ADB forecasts Pakistan’s GDP growth at 3.7% in both FY2026 and FY2027. Inflation is projected at 7.2% in FY2026 and 8.3% in FY2027.

Fiscal reforms remain key

The ADB said Pakistan’s medium-term fiscal outlook will depend on continued implementation of reforms under the IMF program.

The bank said greater transparency, stronger tax administration and more efficient public spending could reinforce fiscal credibility and lower borrowing costs.

It also identified energy-sector reforms and the restructuring or privatization of state-owned enterprises as potential drivers of higher productivity and private investment.

The ADB further pointed to Pakistan’s IT and digital-services sector as an area with potential to support export-led growth and reduce the economy’s exposure to fluctuations in commodity prices.

At the regional level, the bank warned that renewed escalation of the Middle East conflict and prolonged disruptions in energy markets could add to inflation and external pressures, underscoring the importance of maintaining fiscal and external buffers.

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