Fitch Ratings has credited Pakistan’s federal budget FY2026-27 for maintaining a clear commitment to fiscal discipline under the International Monetary Fund (IMF)’s Extended Fund Facility, noting it targets a primary surplus of 2% of GDP and an overall deficit of 3.6% of GDP.
In a statement, the credit ratings agency said the targets follow a strong FY26 performance, with a projected primary surplus of 2.5% of GDP, driven by aggressive spending cuts and provincial surplus of 1.1% of GDP, exceeding expectations. It stressed this policy momentum improves near-term fiscal prospects, but Pakistan remains relatively vulnerable to inflation and under-performance on tax collection.
According to Fitch, its fiscal projections remain more cautious than those of the government, illustrating risks around the key targets. Achieving the FY27 primary surplus depends on sustained revenue over-performance relative to historical trends, which it said was challenging given structural weaknesses in tax administration and a limited pipeline of new tax measures.
Federal tax collections in FY26 are officially projected to be 0.7% of GDP below target, underscoring persistent challenges in meeting ambitious revenue goals, it noted. The FY27 tax revenue target (10.6% of GDP) would be a record, building on improved collection in FY26, it said, adding non-tax revenues, including profit transfers from the State Bank of Pakistan, are set to decline in FY27.
The reliance on a large provincial surplus is another source of uncertainty, given historical variability and coordination challenges between federal and provincial governments.
Amid revenue challenges, fiscal consolidation has relied heavily on expenditure compression, particularly cuts to capital spending, as in FY26. While this has supported short-term deficit reduction, it would be difficult to sustain as a medium-term strategy, Fitch warned. Persistently low capex may weigh on medium-term economic growth, limit future revenue mobilization, and complicate debt dynamics. The scope for further reductions is narrowing, heightening the trade-off between fiscal adjustment and growth as spending pressures rise from a suppressed base.
Interest costs remain structurally elevated due to Pakistan’s large stock of short-maturity domestic debt and high market yields. A rising policy rate as inflation rises due to higher world energy costs compounds the risk of overspending on interest payments.
The FY27 budget’s interest/revenue ratio, projected at 39.1% is substantially above the median 12.1% of ‘B’ rated peers. This limits fiscal flexibility and crowds out priority spending, forming a weakness in Pakistan’s rating of ‘B-’ with a Stable Outlook, it said. Pakistan’s overall fiscal deficit at 3.6% of GDP in FY27 also remains larger than the ‘B’ rating median of 3%, it added.
On the external side, Pakistan’s recent U.S. dollar bond issuance at just under 7% yield demonstrates improved access to international capital markets and bolsters near-term liquidity. Pakistan also issued a Panda Bond in 2026, further marking improved external market access. However, maturities have been short (three years) and medium-term external refinancing risks and structural vulnerabilities in Pakistan’s debt profile remain. Continued dependence on multilateral funding and financial assistance from bilateral partners—particularly from China and the Gulf Cooperation Council—leaves Pakistan exposed to shifts in creditor confidence and FX reserve adequacy.
Fiscal consolidation remains dependent on sustained primary surpluses and improved revenue performance, with the credibility of budget targets, sustainability of provincial surpluses, and the developments around growth and interest costs central to the success of Pakistan’s IMF program and the rating consideration, Fitch concluded.