The latest consolidated fiscal operations data released by the Finance Division for July to December 2025-26 paints a mixed picture of Pakistan’s economic management. On the surface, tax revenues and primary balances show some improvement, suggesting tighter fiscal discipline. Yet beneath these figures lies a more complicated reality marked by rising current expenditure, increasing debt servicing costs, and widening concerns about sustainability.
The first half of the fiscal year reveals both progress and pressure points. While revenue authorities have strengthened collection efforts, the government’s spending — particularly on debt servicing and defense — has grown rapidly. Development spending also tells a contrasting story, with authorized funds not fully translating into actual disbursements. Together, these trends highlight the delicate balance policymakers face between stabilizing the economy and sustaining growth amid inflationary pressures and structural weaknesses.
One of the most striking developments in the data is the sharp increase in current expenditure between the first and second quarters of the fiscal year. Government spending rose from roughly Rs4 trillion during July–September to Rs5.5 trillion by the end of December. This significant jump reflects mounting financial obligations, particularly those linked to borrowing costs.
The primary driver behind this surge has been the rise in mark-up payments on debt. Interest payments climbed from Rs1.38 trillion in the first three months to Rs3.56 trillion over the six-month period. This increase came despite a decline in domestic bank borrowing, which shifted from negative Rs2.192 trillion to negative Rs325.4 billion. Non-bank borrowing, which initially showed modest gains, also turned negative by mid-year.
These figures suggest that debt servicing remains a heavy burden even as borrowing patterns change. The growing cost of servicing existing obligations limits fiscal flexibility and reduces the space available for social programs and development investment.
The decline in non-bank borrowing, particularly through savings centres, may indicate broader stress within the economy. Analysts interpret this trend as a reflection of reduced household savings, driven by the high cost of living and stagnating wages in the private sector over recent years. Inflationary pressures have eroded purchasing power, leaving many families with less disposable income to invest in government savings schemes. At the same time, businesses struggling with rising operating costs have found it difficult to increase wages, further squeezing consumers. The result is a weakening savings base that could limit the government’s ability to rely on domestic non-bank financing in the future.
Defense expenditures also increased notably during the first half of the fiscal year. Spending rose from approximately Rs447 billion in the first quarter to nearly Rs1 trillion by December. The rise is largely attributed to growing operational costs linked to an uptick in security challenges and terrorist incidents across the country.
While higher defense spending may be understandable in light of evolving security conditions, it adds further pressure to already stretched fiscal resources. Balancing national security needs with economic stability remains a persistent challenge for policymakers.
Excluding borrowing costs, the government’s primary balance showed improvement, rising from Rs3.497 trillion to Rs4.106 trillion during the first six months. This indicates stronger fiscal management in areas other than debt servicing.
However, the overall budget balance tells a less encouraging story. The surplus narrowed significantly from Rs2.119 trillion in July–September to just Rs541.882 billion by December. In percentage terms, the deficit ratio improved from 1.6 percent to 0.4 percent, based on a budgeted GDP of Rs129,567 billion, but this change may partly reflect assumptions rather than structural improvements.
GDP estimates themselves are under scrutiny, as the International Monetary Fund has highlighted gaps in source data affecting sectors accounting for nearly one-third of the economy. This review raises questions about how accurately fiscal performance is being measured.
Development expenditure and net lending rose sharply from Rs295 billion in the first quarter to nearly Rs964 billion by mid-year. Yet closer analysis suggests this rise reflects accounting changes and net lending rather than actual project spending. According to figures from the Ministry of Planning, Development and Special Initiatives, although Rs356 billion were authorized for development during July–December, only around Rs210 billion were actually spent. This roughly 40 percent shortfall indicates delays in project execution and underscores ongoing inefficiencies in public sector development planning.
Low development spending can hinder long-term growth by slowing infrastructure projects and limiting employment generation, especially at a time when economic momentum is already fragile.
On the revenue side, the Federal Board of Revenue recorded a notable rise in tax collections, increasing from Rs2.9 trillion in the first quarter to Rs6.1 trillion by December. This growth reflects aggressive fiscal tightening and stronger enforcement measures.
However, higher taxation can also have a contractionary effect on economic activity if businesses and consumers face reduced spending capacity. Critics argue that while increasing revenue is important, controlling expenditure — especially non-productive current expenditure — should be prioritized in the short term.
A major contributor to non-tax revenue growth was the petroleum levy, which rose from Rs371.6 billion to over Rs822 billion. While this helped strengthen government income, it may also explain declining public savings, as higher fuel costs increase living expenses.
Provincial governments also improved their tax collections, which rose from Rs268.9 billion to Rs568.5 billion during the first half of the fiscal year. Much of this increase came from sales tax on services rather than reforms in agricultural or real estate taxation — areas that had been identified as potential revenue sources under international reform discussions.
At the same time, federal transfers to provinces doubled, reaching Rs3.6 trillion by December. This influx contributed to higher provincial spending but also highlights continued reliance on federal resources rather than self-sustained provincial revenue generation.
Another issue emerging from the fiscal data is the growing statistical discrepancy, which widened from negative 261 billion rupees to negative Rs413 billion. While provincial discrepancies narrowed slightly, broader inconsistencies remain a concern.
The International Monetary Fund has also pointed to substantial discrepancies in trade statistics, including billions of dollars in import data requiring review. Reducing these inconsistencies is essential for improving policy credibility and ensuring accurate economic planning.
Pakistan’s fiscal performance during the first half of 2025-26 reflects a complex mix of progress and strain. Revenue collection has improved and primary balances show signs of discipline, yet soaring debt servicing costs, rising current expenditure, and underutilized development funds reveal structural weaknesses that cannot be ignored.
The data suggests that simply raising taxes will not be enough to secure long-term fiscal stability. A stronger emphasis on reducing non-essential spending, improving development execution, and expanding productive economic activity may be necessary to create a more balanced path forward. As GDP figures undergo review and economic uncertainties persist, the coming quarters will be crucial in determining whether fiscal reforms translate into sustainable growth or deeper structural pressures.