Record improvement in public finances signals strengthening fiscal discipline and narrowing twin deficits
Pakistan has reported a sharp contraction in its budget deficit, which fell to just 0.7% of GDP during the first nine months (July–March) of fiscal year 2025-26, compared to 3.7% in the same period last year.
The latest fiscal performance reflects one of the strongest improvements in recent years and suggests a significant shift toward macroeconomic stabilization, fiscal discipline, and improved economic coordination.
According to officials, the results indicate a rare simultaneous improvement in both fiscal and external accounts, with Pakistan also posting a current account surplus during the same period.
Strong primary surplus supports debt sustainability
Pakistan recorded a primary surplus of 3.2% of GDP in 9MFY26, slightly higher than the 3.0% surplus achieved in the corresponding period last year.
A primary surplus—budget balance excluding interest payments—is widely viewed by economists as a key indicator of debt sustainability, as it reflects the government’s ability to meet expenses without relying heavily on additional borrowing.
The performance suggests that fiscal consolidation measures introduced over the past two years are beginning to deliver structural improvements in public finances.
Revenue growth strengthens fiscal position
The improvement in the fiscal balance was driven by stronger revenue collection, with both tax-to-GDP and overall revenue ratios showing steady gains.
Officials credited tax reforms, improved enforcement, digitization of tax systems, and broader compliance measures for expanding the tax base and boosting collections.
At the same time, government spending remained relatively controlled despite global inflationary pressures and high debt-servicing costs.
Current expenditures stabilized during the period, while development spending was maintained to support infrastructure and economic activity. Defense spending as a share of GDP also remained broadly contained, reflecting tighter expenditure management across the fiscal framework.
Debt outlook improves as borrowing pressures ease
Economists say sustained primary surpluses are helping reduce refinancing risks, improve debt maturity structures, and gradually lower the public debt-to-GDP ratio.
This trend is viewed as critical for strengthening sovereign sustainability after years of external financing constraints and recurring balance-of-payments pressures.
External account stability reinforces fiscal gains
Pakistan’s external position also showed marked improvement during 9MFY26, with the country recording a current account surplus alongside a significantly reduced fiscal deficit.
This simultaneous narrowing of “twin deficits” is considered a rare macroeconomic development for Pakistan, which has historically faced persistent fiscal and external imbalances.
The improvement has contributed to greater exchange rate stability, easing inflationary pressures, and strengthening foreign exchange reserves.
Investor sentiment shows early recovery signs
Improving macroeconomic indicators have also begun to restore investor confidence. Pakistan has re-entered international capital markets after a prolonged period of financial stress, while manufacturing activity, corporate earnings, and foreign inflows have shown signs of recovery.
Initial public offering (IPO) activity has also picked up, reflecting improving sentiment in financial markets.
Multilateral lenders, credit rating agencies, and foreign investors have acknowledged the country’s improving fiscal and external position, particularly in the context of ongoing economic reform programs.
Sustainability challenges remain
Despite the positive developments, economists caution that maintaining fiscal discipline will be critical going forward. Pakistan remains exposed to external shocks, global commodity price volatility, and domestic revenue constraints.
Analysts also emphasize the need for continued structural reforms and political stability to ensure that recent gains are not reversed.
One of the strongest fiscal turnarounds in years
Despite risks, the latest figures mark one of Pakistan’s most significant macroeconomic turnarounds in recent years.
For decades, persistent twin deficits have been a key source of economic instability. The recent simultaneous improvement in both fiscal and external accounts is being viewed by policymakers as a potential foundation for stronger long-term growth, improved financial resilience, and sustained investor confidence.