Pakistan’s fiscal discipline significantly improved: Fitch

Pakistan’s fiscal management has shown significant improvement, according to a Fitch report, which highlighted progress in reducing the fiscal deficit and achieving a historic primary surplus.

Fitch stated that Pakistan’s fiscal deficit remained limited to 3 per cent of GDP in fiscal year 2026, while the country recorded its largest-ever primary surplus of 2.5 percent of GDP during the same period.

The report noted that lower interest rates and profits transferred by the State Bank of Pakistan played an important role in improving the fiscal position. However, Fitch added that the continuation of unusually high State Bank profit transfers is unlikely in the coming years.

For fiscal year 2027, Fitch expects Pakistan’s fiscal deficit to rise to 4 per cent of GDP, while the government has set a target of 3.6 per cent for the same period.

The report pointed out that Pakistan’s tax-to-GDP ratio remains very low at just 10.2 per cent, stressing that administrative reforms and expansion of the tax base are necessary to improve revenue collection.

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Fitch expects tax revenues to reach 10.3 per cent of GDP in fiscal year 2027. The report also stated that opportunities for further cuts in government expenditure have become increasingly limited.

Debt servicing remains one of Pakistan’s major fiscal challenges, with interest payments continuing to place pressure on public finances. Fitch estimates that interest payments as a share of revenue could remain around 40.4 per cent in fiscal year 2027.

The report warned that weak implementation capacity of provincial governments could pose risks to achieving budget targets. It added that effective enforcement of agricultural income tax will depend on provincial performance.