Pakistan has achieved a significant milestone in its journey toward economic stability, successfully closing fiscal year 2025-26 with its overall Pakistan fiscal deficit FY26 dropping to 2.6% of GDP. This performance, driven by a robust primary budget surplus, signals a promising shift in the nation’s fiscal health and economic trajectory.
What Happened
According to provisional data from the Ministry of Finance, Pakistan recorded an overall budget deficit of Rs3.31 trillion, equivalent to 2.6% of GDP, for fiscal year 2025-26. This achievement was underpinned by a substantial primary budget surplus, which represents revenues after accounting for interest costs. The unadjusted primary surplus soared to Rs3.63 trillion, or 2.9% of GDP, comfortably surpassing the International Monetary Fund’s (IMF) target of Rs3.16 trillion by Rs464 billion. Officials indicated that even after adjustments for foreign project loans and circular debt, the government remained well-positioned to meet its IMF conditions.
The year saw total revenue reach Rs19.77 trillion (15.6% of GDP). Tax revenue contributed Rs14.22 trillion (11.2% of GDP), while non-tax revenue added Rs5.55 trillion (4.4% of GDP). The Federal Board of Revenue (FBR) collected Rs13.01 trillion, marking an 11% increase over the previous fiscal year. Notable contributions to non-tax revenue included Rs2.43 trillion in profit from the State Bank of Pakistan (SBP) and Rs1.57 trillion from petroleum levy collections, which saw a 28% year-on-year increase. Provincial tax collection also rose to Rs1.21 trillion, up 24%, with provincial non-tax revenue climbing by 50% to Rs471 billion.
Total expenditure for FY26 amounted to Rs23.09 trillion, representing 18.2% of GDP. Current expenditure accounted for the majority at Rs20.69 trillion (16.3% of GDP), while development expenditure and net lending stood at Rs3.25 trillion (2.6% of GDP). Within current spending, mark-up payments consumed Rs6.95 trillion (5.5% of GDP), and defence spending was Rs2.59 trillion (2.0% of GDP). The federal government managed its primary current expenditure at Rs7.5 trillion, aligning with fiscal discipline targets. Furthermore, an early retirement of Rs1.9 trillion in domestic debt generated savings of Rs1.97 trillion in domestic debt servicing costs compared to the prior year.
Meanwhile, State Bank of Pakistan Governor Jameel Ahmad, speaking at a ceremony marking Pakistan’s 79th Independence Day, affirmed that the past year had brought meaningful progress towards economic stability. He highlighted prudent fiscal and monetary policies as key drivers, noting the country’s transition from stabilization towards sustainable growth. Governor Ahmad reported an average inflation of 7.1% in FY26, with SBP’s monetary policy aimed at keeping inflation within its 5-7% medium-term target. Economic growth for FY26 reached 3.7% and is projected to be between 3.5% and 4.5% in FY27. External sector improvements were also noted, with record remittances exceeding $41 billion in FY26, projected to rise to $44 billion in FY27, and foreign exchange reserves reaching $18.4 billion by the close of FY26, with projections to surpass $21 billion in FY27.
In a separate development signaling increased international connectivity, Saudi Arabia’s new national carrier, Riyadh Air, launched its operations in Pakistan with an inaugural flight to Islamabad. The airline plans seven weekly flights between Riyadh and Islamabad, with additional routes to Lahore, enhancing air links and potentially boosting trade and tourism between the two nations.
Analysis
The significant reduction in Pakistan’s fiscal deficit to 2.6% of GDP for FY26, coupled with an impressive primary surplus, marks a pivotal moment in the nation’s economic recovery efforts. This performance not only demonstrates strong adherence to IMF program conditions but also lays a crucial foundation for enhanced Pakistan economic self-reliance. The outperformance of the primary surplus target by a substantial margin underscores effective fiscal management and a commitment to balancing the national ledger.
The detailed revenue breakdown reveals critical areas of strength: an 11% increase in FBR collections, a 28% surge in petroleum levy, and a significant contribution from SBP profits. These figures suggest that government efforts to broaden the tax base and enhance non-tax revenue streams are yielding tangible results. Simultaneously, strategic expenditure management, particularly the early retirement of domestic debt, has generated substantial savings in debt servicing costs, alleviating pressure on the national budget. This fiscal discipline directly supports Governor Jameel Ahmad’s assertions about prudent fiscal policies driving economic stability and moving Pakistan beyond a mere stabilization phase towards sustainable growth.
The SBP’s perspective further reinforces this optimistic outlook. With economic growth reaching 3.7% in FY26 and projected to maintain momentum in FY27, coupled with a manageable inflation rate within the target range, the macroeconomic environment appears increasingly conducive to investment and job creation. The consistent growth in remittances, projected to reach $44 billion in FY27, highlights continued confidence from overseas Pakistanis and provides a vital inflow of foreign exchange, bolstering the country’s external position alongside rising foreign exchange reserves. This comprehensive approach to fiscal and monetary management is crucial for Pakistan to secure long-term economic independence and reduce its reliance on external financing. For more context on Pakistan’s long-term fiscal journey, readers might find our previous article, “Pakistan’s Fiscal Sovereignty: An Unfinished Project at 79”, highly relevant.
The launch of Riyadh Air’s operations in Pakistan, while seemingly distinct, subtly complements this narrative of improving economic prospects. Enhanced air connectivity can facilitate trade, investment, and tourism, providing additional avenues for foreign exchange earnings and fostering stronger bilateral ties. Such developments reflect a growing international confidence in Pakistan’s improving economic climate, aligning with the broader goal of a more open and transparent economy, as evidenced by the SBP’s push for digital payments and financial inclusion initiatives like InvestPak.
Key Takeaways
- Pakistan’s overall budget deficit for FY26 significantly reduced to 2.6% of GDP, reflecting improved fiscal health.
- The primary budget surplus of 2.9% of GDP comfortably exceeded the IMF’s target, indicating strong fiscal discipline.
- Revenue generation saw notable increases, with FBR collections up 11% and petroleum levy up 28%, alongside substantial SBP profits.
- Economic growth reached 3.7% in FY26, with projections for continued sustainable growth in FY27, supported by prudent policies.
- Foreign exchange reserves climbed to $18.4 billion and are projected to surpass $21 billion, while remittances exceeded $41 billion in FY26, strengthening the external sector.
The Insider Take
For Pakistani investors and businesses, the substantial reduction in the Pakistan fiscal deficit FY26 and the strong primary surplus are more than just headline numbers; they signal a fundamental shift in the country’s economic management. This fiscal discipline translates directly into reduced sovereign risk and improved creditworthiness, potentially leading to lower borrowing costs for both the government and, by extension, the private sector. A more stable fiscal environment makes Pakistan a more attractive destination for foreign direct investment, as demonstrated by the expansion of international players like Riyadh Air.
The SBP’s commitment to maintaining inflation within its medium-term target while fostering economic growth provides a predictable and supportive monetary policy landscape. This stability is crucial for businesses planning long-term investments and for consumers managing their purchasing power. The rise in foreign exchange reserves and remittances offers a buffer against external shocks, reducing currency volatility and providing greater certainty for import-dependent industries and those engaged in international trade. Businesses should closely monitor the government’s continued adherence to fiscal discipline and the SBP’s monetary policy stance, as these will be key determinants of sustained economic momentum and future opportunities in a more self-reliant Pakistan.
PS: For educational purposes only. Not financial advice. Investing involves risk.