Higher revenues, lower interest payments and tighter spending helped Pakistan sharply improve its fiscal position during FY2025-26.
ISLAMABAD: Pakistan recorded a remarkable contraction in its overall budget deficit to 2.6% of gross domestic product (GDP) during fiscal year 2025-26, down significantly from 5.4% in the preceding year, according to provisional fiscal data released by the Ministry of Finance.
The consolidated fiscal operations of the federal and provincial governments showed that the overall budget deficit fell to Rs3.31 trillion in FY26 from Rs6.17 trillion in FY25, representing an improvement of Rs2.85 trillion.
The sharp reduction in the fiscal gap was driven by stronger revenue collection, lower interest payments and tighter overall expenditure.
Revenue collection strengthens
Total government revenue increased to Rs19.77 trillion in FY26 from Rs18 trillion a year earlier.
Tax revenue also recorded strong growth, rising to Rs14.22 trillion from Rs12.72 trillion in FY25.
The increase in revenues provided greater fiscal space and helped the government reduce its reliance on borrowing to finance expenditure.
Government expenditure declines
Total expenditure declined to Rs23.09 trillion during FY26 from Rs24.17 trillion in the previous fiscal year.
Current expenditure fell to Rs20.69 trillion, compared with Rs21.53 trillion in FY25, primarily because of a substantial reduction in interest or mark-up payments.
Interest payments dropped sharply to Rs6.95 trillion from Rs8.89 trillion.
As a result, interest payments as a share of GDP declined from 7.7% to 5.5%, providing significant relief to the government’s fiscal position.
Record primary surplus
Pakistan’s fiscal position was further strengthened by a record primary surplus of Rs3.63 trillion, equivalent to 2.9% of GDP.
This compares with a primary surplus of Rs2.72 trillion, or 2.4% of GDP, recorded in FY25.
The larger primary surplus indicates that government revenues exceeded non-interest expenditure by a wider margin, an important indicator of fiscal consolidation under Pakistan’s ongoing economic reform programme.
Defence and development spending increase
Despite the overall reduction in expenditure, defence spending increased to Rs2.59 trillion in FY26 from Rs2.19 trillion in the preceding year.
Development expenditure and net lending also increased, reaching Rs3.25 trillion compared with Rs2.97 trillion in FY25.
The increase in development spending comes as the government seeks to maintain investment in infrastructure and other development activities while pursuing fiscal consolidation.
Domestic financing remains dominant
The fiscal gap was financed through both domestic and external sources.
Domestic financing amounted to Rs2.14 trillion, while external financing contributed Rs1.18 trillion during FY26.
The financing pattern highlights the continued reliance on domestic borrowing to meet the government’s financing requirements, despite improvements in the overall fiscal balance.
Fiscal consolidation gains momentum
The latest figures point to a substantial improvement in Pakistan’s fiscal position during FY2025-26.
Higher tax revenues, reduced interest costs and tighter expenditure management collectively helped bring the budget deficit down by almost half in GDP terms.
The government will nevertheless face the challenge of maintaining this fiscal discipline while supporting economic growth, development spending and essential public services.
The sharp improvement in the fiscal balance also strengthens Pakistan’s position under its economic reform programme, although sustaining higher revenues and controlling non-interest expenditure will remain crucial for maintaining fiscal stability in the coming years.