Pakistan has recorded a significant improvement in its fiscal position during fiscal year 2025-26, with the overall fiscal deficit declining 46% year on year to Rs3.313 trillion from Rs6.168 trillion in FY25. The deficit stood at 2.6% of gross domestic product, compared with 5.4% a year earlier, marking the lowest fiscal deficit recorded by the country in 22 years. The fiscal deficit has also narrowed by 5.2 percentage points of GDP over the past three years, reflecting a broader consolidation trend supported by stronger revenue collection, lower overall expenditure and reduced domestic debt servicing costs. Pakistan also posted a primary surplus of Rs3.634 trillion, equivalent to 2.9% of GDP, compared with Rs2.719 trillion or 2.4% of GDP in FY25. The primary surplus increased 34% year on year and represents the highest level recorded in at least 26 years, while FY26 marks the third consecutive year in which Pakistan has recorded a primary surplus.
Total government revenue increased 10% year on year to Rs19.774 trillion during FY26 from Rs17.997 trillion in FY25, although revenue as a share of GDP remained broadly stable at 15.6% compared with 15.7%. Tax revenue remained the main contributor, rising 12% to Rs14.219 trillion. Direct tax collections increased 14% to Rs6.586 trillion, while sales tax collections rose 9% to Rs4.254 trillion. Customs duties increased 4% to Rs1.331 trillion and federal excise duty collections rose 10% to Rs840 billion. Provincial tax collections recorded stronger growth of 24%, reaching Rs1.209 trillion. Non-tax revenue increased 5% to Rs5.555 trillion, supported by a 28% rise in petroleum levy collections to Rs1.567 trillion, along with higher royalties from oil and gas and dividend receipts. This improvement was partly offset by a 7% decline in surplus profit transfers from the State Bank of Pakistan.
Total government expenditure declined 4% year on year to Rs23.087 trillion from Rs24.166 trillion in FY25, reducing expenditure as a share of GDP to 18.2% from 21.1%. Current expenditure fell 4% to Rs20.686 trillion, with the most significant reduction coming from mark-up payments on government debt, which declined 22% to Rs6.948 trillion from Rs8.887 trillion. The reduction in domestic debt servicing costs was supported by monetary easing and brought mark-up payments down to 5.5% of GDP from 7.7% previously. Defence expenditure, however, increased 18% to Rs2.588 trillion. Development expenditure and net lending also increased 10% to Rs3.254 trillion from Rs2.966 trillion, while remaining at 2.6% of GDP. The combination of higher revenue and lower overall expenditure helped reduce the government’s financing requirement and contributed significantly to the improvement in the fiscal balance.
The financing structure also shifted during FY26 as external inflows increased and reliance on domestic financing declined. Net external financing rose 90% year on year to Rs1.178 trillion from Rs619 billion in FY25, while net domestic financing fell 61% to Rs2.136 trillion from Rs5.549 trillion. Although domestic financing remained the larger source of deficit financing, the substantial decline in domestic borrowing reflected the narrower fiscal gap. The lower reliance on domestic financing also came alongside slower growth in public debt, which fell to a 20-year low during the year. Both the debt-to-GDP ratio and the interest burden on the government budget declined, strengthening several key indicators of Pakistan’s public finances.
The improvement in fiscal performance has also received recognition from international rating agency S&P Global Ratings, which upgraded Pakistan’s sovereign rating to B with a Stable outlook. The rating agency cited stronger fiscal consolidation and improving sovereign fundamentals. The upgrade follows a year in which Pakistan recorded a lower fiscal deficit, a larger primary surplus, stronger revenue collection and reduced debt servicing costs. The combination of these developments represents a substantial change in the country’s fiscal position compared with previous years of recurring budgetary pressure and higher borrowing requirements. The three consecutive years of primary surpluses also indicate that the improvement has extended beyond a single financial year.
Pakistan’s FY26 fiscal results therefore mark a significant turnaround in the country’s public finances, with the fiscal deficit falling 46% to Rs3.313 trillion and the deficit-to-GDP ratio reaching its lowest level in 22 years. The Rs3.634 trillion primary surplus, equivalent to 2.9% of GDP, represents the highest primary surplus in at least 26 years, while slower debt growth, a lower debt-to-GDP ratio and reduced interest costs have further strengthened the fiscal position. Sustaining these gains will depend on continued revenue growth, expenditure discipline and careful management of public debt and financing requirements. The FY26 performance nevertheless provides Pakistan with stronger fiscal indicators as it enters the new financial year, with lower borrowing needs and improved sovereign fundamentals supporting broader economic stability.
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