Pakistan’s fiscal strategy for fiscal year 2027 is focused on supporting economic activity while maintaining fiscal discipline under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), but the Asian Development Bank (ADB) has warned that ambitious revenue targets alongside higher defense and interest costs could further restrict the government’s room for growth-enhancing expenditure. In its July 2026 Asian Development Outlook, the ADB said Pakistan’s budget targets a consolidated fiscal deficit of 3.6% of gross domestic product (GDP) and an underlying primary surplus of 2.0% of GDP, broadly aligned with the targets agreed under the IMF program.
The fiscal strategy for FY2027 is centered on increasing revenue collection while containing selected expenditures. At the same time, the government has introduced several measures intended to support economic activity, including revised income-tax slabs, a reduction in super tax, lower property transaction taxes and reduced tariffs on industrial inputs. According to the ADB, these measures could provide some support to households, businesses and industrial activity, but any reduction in tax collections resulting from such measures will need to be offset through stronger compliance, enforcement and administrative improvements.
A major challenge identified by the ADB is the Federal Board of Revenue’s (FBR) collection target for FY2027. FBR tax revenue is projected to grow by 17.6% during the fiscal year, increasing tax revenue to 10.6% of GDP from 10.2% in FY2026. The target is expected to be supported by administrative initiatives, including the establishment of a National Faceless Center for automated audits and expanded coverage of the retail sector. However, the ADB described the revenue target as ambitious, particularly in light of revenue shortfalls recorded in FY2025 and FY2026 that previously resulted in adjustments to government expenditure during the fiscal year.
The bank noted that Pakistan’s fiscal pressures could increase during FY2027 as defense spending is projected to rise by 16%, while interest payments face upward pressure from a larger outstanding debt stock and higher policy rates following the Middle East conflict. Lower electricity-sector subsidies and smaller provincial development programs are expected to provide some offset to these pressures. However, the ADB pointed out that the reduction in provincial development spending reflects a compression of provincial resources through a reverse transfer to the federal government under Article 164 of Pakistan’s Constitution rather than a fundamental shift in development priorities.
The ADB warned that if the government fails to achieve its revenue targets, it could once again be required to reduce expenditure during the fiscal year. Such adjustments could further restrict the already limited fiscal space available for public investment and other spending that can support economic growth. The warning comes despite a significant improvement in Pakistan’s fiscal position during FY2026, when the consolidated fiscal deficit declined to 2.6% of GDP from 5.4% in FY2025 and the primary surplus increased to 2.9% of GDP, exceeding the IMF EFF projection of 2.6%.
According to the ADB, much of the improvement in FY2026 was linked to lower interest costs rather than a major expansion of the tax base. FBR collections grew 10.8% year-on-year during FY2026, slowing substantially from 26.1% growth in FY2025, and remained around PKR969 billion below the EFF program benchmark. FBR revenue as a share of GDP remained at 10.2%, indicating limited progress in broadening the tax base. Non-tax revenue reached 4.4% of GDP, supported by a 44.5% increase in Petroleum Development Levy collections and PKR2.428 trillion in profit transfers from the State Bank of Pakistan.
Total government expenditure also declined to 18.2% of GDP in FY2026 from 21.1% a year earlier. Interest payments fell to 5.5% of GDP from 7.7%, which the ADB attributed to lower interest rates and significant early retirement of domestic debt. Non-interest current expenditure increased in absolute terms, while defense spending rose by 18%. Development expenditure increased marginally to 2.7% of GDP from 2.6%, showing that development spending remained a relatively small component of overall government expenditure.
Pakistan also recorded improved access to external financing during the year, with the government raising $750 million through a Eurobond and $250 million through a Panda bond between April and May 2026. The ADB said the transactions indicated renewed access to international capital markets, although the proceeds did not fully cover Eurobond repayments of $500 million in September 2025 and $1.4 billion in April 2026. As a result, net portfolio outflows amounted to $1.2 billion. The State Bank of Pakistan also rolled over several bilateral deposits that matured during the year, refinancing a significant portion of the maturing stock through fresh placements.
Multilateral and bilateral program disbursements supported by the IMF’s EFF remained the main source of external financing. Pakistan’s gross international reserves increased to $18.5 billion by the end of June 2026 from $14.5 billion a year earlier, raising import cover to 2.9 months. The increase in reserves also contributed to improved sovereign credit assessments, while S&P and Moody’s issued sovereign rating upgrades in July and August, respectively. The ADB linked these developments to stronger external liquidity and renewed access to financing.
The ADB forecasts Pakistan’s GDP growth at 3.7% in both FY2026 and FY2027, while inflation is projected at 7.2% in FY2026 and 8.3% in FY2027. The bank said the medium-term fiscal outlook will depend on continued implementation of reforms under the IMF program, with greater transparency, stronger tax administration and more efficient public spending identified as important elements for maintaining fiscal credibility and potentially reducing borrowing costs.
The ADB also identified energy-sector reforms and the restructuring or privatization of state-owned enterprises as areas that could contribute to higher productivity and increased private investment. Pakistan’s information technology and digital-services sector was highlighted as another area with potential to support export-led growth and reduce exposure to fluctuations in commodity prices. At the regional level, the bank warned that renewed escalation of the Middle East conflict and prolonged disruptions in energy markets could add to inflation and external pressures, making the maintenance of adequate fiscal and external buffers an important consideration for Pakistan’s FY2027 economic strategy.
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