Pakistan’s latest fiscal figures provide a rare measure of encouragement for an economy that has spent years struggling with persistent deficits, rising public debt and weak revenue mobilisation. According to the Finance Ministry’s fiscal operations report for 2025-26, the country’s fiscal deficit declined to 2.6 percent of GDP, equivalent to around Rs3.3 trillion, marking its lowest level in 22 years.
The improvement is significant. It suggests that the government’s efforts to bring public finances under control are beginning to produce measurable results and that some of the immediate pressures on the economy have eased. The government also recorded a primary surplus of Rs3.634 trillion, or 2.9 percent of GDP, an important indicator because it shows that revenues exceeded non-interest expenditures by a substantial margin.
Several factors contributed to the improved fiscal position. Provincial governments collectively generated a surplus of Rs1.449 trillion, while the federal government benefited from savings of Rs1.967 trillion in domestic debt-servicing costs. Higher collections from the petroleum levy also helped strengthen government finances. These figures deserve recognition, particularly after years in which Pakistan struggled with large fiscal gaps and rapidly expanding public debt. Yet the numbers should not be interpreted as evidence that the country’s underlying fiscal problems have been permanently resolved. The latest improvement is encouraging, but much of it reflects circumstances and expenditure adjustments that may not be sustainable without deeper structural reforms.
The most important question is therefore not whether Pakistan managed to reduce its deficit in 2025-26, but whether it can maintain that improvement in the years ahead. A fiscal deficit of 2.6 percent of GDP is undoubtedly a major improvement compared with the much higher deficits recorded in previous years. However, the figure remains significant when viewed against the size of Pakistan’s accumulated public debt and the narrowness of its tax base. The country continues to devote a substantial portion of its revenues to debt servicing, leaving limited resources for infrastructure, education, healthcare and other development priorities.
Moreover, the composition of the fiscal improvement warrants closer scrutiny. A considerable part of the reduction came from provincial surpluses, lower domestic debt-servicing costs and restraint in development expenditure. These measures can help achieve short-term fiscal targets, but they do not necessarily address the fundamental weakness of the revenue system.
The Federal Board of Revenue remains at the centre of this problem. Its inability to consistently achieve ambitious revenue targets, including those agreed with the International Monetary Fund, highlights the limitations of the existing tax collection system. Pakistan continues to have a relatively narrow documented tax base, significant tax exemptions and substantial economic activity that remains outside the formal tax net. Without a durable expansion of tax revenues, fiscal consolidation will remain vulnerable. Governments can cut expenditure for a period, delay development projects or benefit from lower interest costs, but these measures cannot substitute for a stronger and broader revenue base.
Public debt remains another major constraint. Although the pace of debt accumulation has reportedly moderated, the overall stock remains exceptionally large and continues to impose a heavy burden on the economy. Debt servicing absorbs resources that could otherwise be used for productive investment and public services. It also limits the government’s ability to respond effectively when the economy faces external shocks, natural disasters or sudden increases in energy and commodity prices.
The government’s continued need to borrow also has wider economic consequences. Heavy public-sector borrowing can compete with the private sector for available credit, making it more difficult for businesses to finance expansion and investment. When combined with elevated interest rates, this can suppress economic activity, discourage new investment and weaken business confidence.
The relationship between fiscal and monetary policy is particularly important in this context. Pakistan’s central bank has maintained the policy rate at 11.5 percent, reflecting the continuing need to remain cautious about inflation and macroeconomic stability. If fiscal pressures remain high, monetary authorities have less room to reduce interest rates without risking renewed inflationary or external pressures.
A credible and sustained fiscal consolidation programme could therefore provide the monetary authorities with greater space to ease financial conditions. Lower interest rates, in turn, could reduce the cost of borrowing for businesses and households, encourage investment and support economic growth.
Pakistan’s recent sovereign credit-rating upgrade to ‘B’ by S&P Global Ratings is another indication that international institutions are beginning to recognise improvements in macroeconomic management and the country’s external position. The upgrade is important because a stronger sovereign rating can eventually reduce borrowing costs and improve investor confidence.
Nevertheless, a ‘B’ rating remains firmly in the sub-investment-grade category. Pakistan therefore remains a relatively high-risk destination for international capital. Many institutional investors are restricted from investing in assets below investment grade, while others require higher returns to compensate for the perceived risks.
The challenge is consequently to turn a single year of improved fiscal performance into a sustained trend. S&P has indicated that further rating improvements would depend on Pakistan maintaining its fiscal deficit below three percent of GDP, reducing government debt to below 60 percent of GDP and bringing external debt below 100 percent of current account receipts. These benchmarks underline an important point: international investors and rating agencies are looking for consistency rather than temporary improvements.
Pakistan’s priority should therefore be to institutionalise fiscal discipline. The country needs a broader tax base, stronger compliance, fewer exemptions and a revenue system capable of generating higher collections without placing an excessive burden on existing taxpayers. At the same time, government spending must become more efficient, with greater emphasis on productive investment and less tolerance for wasteful expenditure.
The government has demonstrated that fiscal stabilisation is achievable. The decline in the deficit and emergence of a sizable primary surplus are important achievements that should not be dismissed. But they should be regarded as a foundation for reform rather than an endpoint.
The real test will come in the years ahead. If Pakistan can sustain deficits below three percent of GDP, steadily reduce its debt burden, strengthen revenue mobilisation and create room for lower interest rates, the current improvement could mark the beginning of a genuine economic turnaround. If, however, fiscal gains depend primarily on temporary savings, provincial surpluses and curtailed development spending, the underlying weaknesses could quickly re-emerge.
Pakistan cannot afford another cycle in which short-term fiscal relief creates the illusion of lasting stability. The country needs to convert this moment of relative stability into lasting structural reform. Only then can fiscal consolidation translate into lower borrowing costs, greater private investment, stronger economic growth and a more resilient economy.