Pakistan’s fiscal position recorded a substantial improvement during fiscal year 2026, with the fiscal deficit narrowing to 2.6 percent of gross domestic product from 5.4 percent in the previous year. The deficit stood at Rs3,313.4 billion during FY2026, compared with Rs6,168 billion in FY2025. The improvement was supported by stronger government revenue and prudent expenditure management, marking a significant reduction in the financing gap during the year.
Total government revenue increased by 9.9 percent during FY2026, reaching Rs19,773.9 billion. The increase in revenue provided greater support to the government’s fiscal position as expenditure was simultaneously brought down. Total expenditure declined by 4.5 percent to Rs23,087.4 billion during the year, creating a narrower gap between government receipts and spending.
Current expenditure also declined during FY2026, falling by 3.91 percent. A major factor behind the reduction was the 21.8 percent decline in mark up payments. Lower debt servicing costs helped reduce pressure on current spending and contributed significantly to the improvement in the overall fiscal balance. The decline in mark up payments provided additional fiscal space while allowing the government to record a lower overall deficit.
At the same time, development expenditure moved in the opposite direction and increased by 14.9 percent during FY2026. The higher development spending contributed to an increase in economic activity while the government continued to reduce the overall fiscal deficit. The combination of increased development expenditure and lower current spending reflects a shift in the composition of government expenditure during the fiscal year.
The improvement in the fiscal balance was also accompanied by a stronger primary surplus. Pakistan recorded a primary surplus of 2.9 percent of gross domestic product, equivalent to Rs3,634.2 billion, during FY2026. This was higher than the primary surplus of 2.4 percent of gross domestic product, or Rs2,719.4 billion, recorded during the previous year. The increase indicates a stronger fiscal position before accounting for government mark up payments.
Revenue collection also remained stronger at the beginning of FY2027. During July 2026, the Federal Board of Revenue recorded tax collection of Rs820.9 billion, representing growth of 8.4 percent compared with the same month last year. The July performance provides an early indication of revenue mobilisation during the new fiscal year as the government continues to focus on strengthening tax collection.
Both direct and indirect tax collections increased during July. Direct tax collection grew by 3.0 percent, while indirect tax collection recorded stronger growth of 11.9 percent. The increase in indirect taxes was supported by higher sales tax and federal excise duty collections. Sales tax revenue increased by 18.3 percent, while federal excise duty collection rose by 3.4 percent during the month.
The stronger tax collection at the beginning of FY2027 follows the improvement recorded in the overall fiscal position during FY2026. Higher revenue growth was one of the main factors supporting the reduction in the fiscal deficit, while lower government expenditure further strengthened the fiscal outcome. Maintaining this trend will remain important as the government moves through the new fiscal year and seeks to preserve the gains achieved through fiscal consolidation.
The sharp reduction in the fiscal deficit also represents a significant improvement compared with the previous year. The deficit declined from Rs6,168 billion in FY2025 to Rs3,313.4 billion in FY2026, while its share of gross domestic product fell from 5.4 percent to 2.6 percent. The improvement was achieved alongside a rise in development expenditure, which increased by 14.9 percent during the year.
Lower mark up payments played an important role in the fiscal improvement. With current expenditure declining by 3.91 percent and mark up payments falling by 21.8 percent, the government was able to reduce overall spending despite maintaining higher development expenditure. This combination contributed to the reduction in the overall fiscal deficit and the improvement in the primary balance.
The fiscal improvement also provides a stronger starting position for FY2027. Higher revenue, reduced expenditure and a larger primary surplus can help strengthen the government’s capacity to manage its fiscal requirements. However, maintaining revenue growth and controlling expenditure will remain important as the government faces ongoing debt servicing and other public financing requirements.
The July tax collection figures suggest that revenue mobilisation continued to improve as FY2027 began. FBR’s Rs820.9 billion collection represented an 8.4 percent increase from July last year, with particularly strong growth in indirect taxes. The 18.3 percent increase in sales tax collection was the largest reported growth among the specified indirect tax categories, while federal excise duty increased by 3.4 percent.
Pakistan therefore closed FY2026 with a considerably stronger fiscal position than the previous year. Revenue rose to Rs19,773.9 billion, expenditure declined to Rs23,087.4 billion, and the fiscal deficit narrowed to Rs3,313.4 billion, equivalent to 2.6 percent of GDP. The primary surplus also increased to Rs3,634.2 billion, or 2.9 percent of GDP.
With FY2027 now underway, the early increase in FBR tax collection provides further support for the government’s fiscal consolidation efforts. Continued revenue growth, disciplined expenditure management and careful management of debt servicing costs will be important for sustaining the improvement achieved during FY2026 while maintaining development spending and supporting economic activity.
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