Fitch sees Pakistan's FY27 deficit at 4% of GDP

July 16, 2026 (MLN): Pakistan’s FY27 budget points to continued fiscal discipline, but the quality and durability of consolidation remain open to question.

The public finances of Pakistan (B-/Stable) have improved significantly in recent years, with the authorities estimating an overall general government deficit of 3.0% of GDP in FY26, 0.9pp below target and lower than our expectations, according to Fitch Ratings.

This was accompanied by a historic primary surplus of 2.5% of GDP.

However, the FY26 outturn was supported by factors that may not last.

Lower interest costs were a key driver, reflecting policy-rate cuts and the repricing of domestic debt at lower yields.

In addition, elevated State Bank of Pakistan (SBP) profit transfers boosted non-tax revenue, while a compression of capital spending helped offset a tax shortfall of 0.7% of GDP.

Fitch said it expects fiscal outcomes to stay stronger than historical norms in FY27, forecasting a 4.0% of GDP overall deficit and a 1.9% of GDP primary surplus.

This is a bit weaker than the FY27 budget's targets for an overall deficit of 3.6% of GDP and a primary surplus of 2.0% of GDP.

A key constraint is the weakness of the revenue base, the agency said. Tax revenue for FY26 is officially estimated at 10.2% of GDP  very low for Fitch-rated sovereigns.

Pakistan's federal tax take has repeatedly underperformed targets, and the policy focus is on improving tax administration, strengthening compliance, and broadening the base.

While these measures are directionally positive, Fitch said gains may be slow to be realized.

It forecast tax revenue at 10.3% of GDP and total revenue at 13.5% in FY27, below FY26 levels as unusually high SBP dividend income recedes in a lower interest-rate environment.

Options for spending cuts to compensate are close to exhaustion; the FY27 budget has capex rising to 0.9% of GDP, which Fitch regards as a feasible minimum after the FY26 underspend.

Social spending is also low and ring-fenced by Pakistan's IMF programme.

Despite improvements, debt affordability metrics remain a major rating weakness.

Low revenue, along with a shallow domestic capital market and high government borrowing costs, will keep the general government interest/revenue ratio high at 40.4% in FY27.

This is down from a peak of 61.5% in FY24 but remains the second-highest among 'B' rated sovereigns and far above the 12.7% peer median.

Another risk to budget execution lies at the provincial level.

The agency expects the provincial surplus to come in below budget, reflecting coordination and implementation challenges between the federal and provincial governments.

This is particularly relevant for measures such as the agricultural income tax, where effective implementation depends on provincial action.

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