Fiscal Deficit Falls to 0.7% of GDP

Pakistan posts historic decline in fiscal deficit during FY26

Pakistan recorded its lowest fiscal deficit in almost three decades during the first nine months of the current fiscal year, reflecting stronger provincial surpluses, rising petroleum levy collections and a sharp reduction in debt servicing costs.

Official fiscal operations data released by the Ministry of Finance showed that the fiscal deficit narrowed significantly to Rs856 billion, equivalent to 0.7 per cent of GDP, during July-March FY2025-26. In the same period last year, the deficit stood at Rs 2.97 trillion, or 2.6% of GDP.

The latest figures represent one of the strongest fiscal turnarounds in recent years as the government attempted to stabilise public finances under the International Monetary Fund’s reform programme.

Economic officials attributed the improvement largely to record provincial cash surpluses and lower interest payments following easing borrowing costs compared to last year’s historically high rates.

Punjab emerged as the largest contributor among provinces, generating a surplus of Rs824bn during the first nine months of the fiscal year. Sindh posted a surplus of Rs 441 bn, while Khyber Pakhtunkhwa and Balochistan contributed Rs 253 bn and Rs 118 bn, respectively.

Collectively, the four provinces generated a surplus exceeding Rs 1.63 trillion, surpassing the annual target agreed with the IMF under the Extended Fund Facility.

Another major factor behind the improved fiscal position was the sharp increase in petroleum levy collection, which surged by 45% to more than Rs 1.2 tr during July-March. The levy remained one of the government’s largest non-tax revenue sources amid elevated fuel prices in global markets.

Meanwhile, lower debt servicing costs also eased pressure on federal finances. Interest payments declined by nearly Rs 1.5tr compared to the same period last year, helping the government contain overall expenditure growth.

The Ministry of Finance data also showed that the primary surplus — excluding interest payments — rose to Rs 4.1 tr, reflecting continued fiscal tightening measures.

Despite the improvement in headline fiscal indicators, concerns persisted regarding weaker revenue performance. The overall revenue-to-GDP ratio declined to 11.4pc, while tax collection as a percentage of GDP also slipped slightly compared to the previous year.

Sales tax and customs duty collections showed slower growth, highlighting ongoing challenges in broadening the tax base and improving economic documentation.

At the same time, defence spending and subsidy-related expenditures increased during the period. Defence expenditure rose to Rs 1.69 trillion, while subsidy payments climbed to Rs 632 billion.

Economic analysts say the latest fiscal numbers indicate improving financial discipline and reduced debt pressure but stress that sustainable stability will require stronger tax reforms, export growth and investment-led economic expansion.