Pakistan has concluded fiscal year 2025-26 with a major improvement in its public finances, recording its strongest fiscal turnaround in decades as the country moved away from recurring fiscal pressure towards greater financial stability. The latest fiscal performance reflects a significant improvement in the government’s ability to manage its finances, with the fiscal deficit declining sharply and the primary balance moving further into surplus.
The fiscal deficit stood at 2.6 percent of gross domestic product during FY26, marking the lowest level recorded in 22 years. The improvement represents a substantial shift in Pakistan’s fiscal position, particularly after years of elevated deficits that placed pressure on public finances, borrowing requirements and debt servicing costs. The reduction in the deficit indicates a stronger balance between government revenues and expenditures during the financial year.
Pakistan’s primary surplus also reached 2.9 percent of GDP in FY26, the highest level recorded in at least 26 years. The primary balance measures government revenue against expenditure before interest payments on public debt. A higher primary surplus indicates that the government generated a larger excess of revenues over non-interest expenditure, providing greater room to manage debt servicing obligations.
The country has now recorded primary surpluses for three consecutive years, marking an extended period of improvement in its fiscal position. Maintaining a primary surplus over multiple years represents an important change from Pakistan’s previous pattern of persistent fiscal deficits and reflects continued efforts to strengthen government finances.
The fiscal deficit has also improved by 5.2 percentage points over a period of just three years. The scale of this reduction highlights the pace at which Pakistan’s fiscal position has changed. A narrower deficit reduces the government’s immediate financing requirements and can help limit additional pressure on public debt, provided the improvement is maintained over time.
Another important development has been the slowdown in debt growth. According to the latest figures, Pakistan’s debt growth fell to a 20-year low during FY26. The decline in the pace of debt accumulation comes alongside improvements in the debt-to-GDP ratio and the government’s interest burden, suggesting that fiscal consolidation has begun to translate into improvements across several key indicators of public finances.
The reduction in the debt-to-GDP ratio is particularly relevant for Pakistan because the size of public debt relative to the economy has remained a major concern for policymakers and investors. A declining ratio can improve the government’s fiscal position by reducing the relative weight of outstanding debt compared with the size of the economy. The lower interest burden also provides potential relief to government finances, as a smaller share of resources is required to meet debt servicing costs.
The improvement in fiscal indicators has also been recognised by international rating agencies. S&P upgraded Pakistan’s sovereign rating to B with a Stable outlook, citing stronger fiscal consolidation and improving sovereign fundamentals. The rating action provides external recognition of the progress made in strengthening the country’s public finances.
The combination of a lower fiscal deficit, a higher primary surplus, slower debt growth and a reduced interest burden represents a broad improvement rather than a change in a single fiscal indicator. These developments collectively point towards a stronger fiscal position at the end of FY26.
The three consecutive years of primary surpluses are particularly significant because maintaining a surplus requires government revenues to remain ahead of non-interest spending. Continued fiscal discipline can help reduce the need for additional borrowing and support efforts to improve the sustainability of public debt.
At the same time, the improvement in fiscal indicators provides a stronger base for economic stability. Lower borrowing requirements can reduce pressure on financial resources, while a declining interest burden can create additional fiscal space for government priorities. The extent to which these gains can be maintained will depend on revenue performance, expenditure management, economic growth and future borrowing requirements.
Pakistan’s fiscal turnaround also comes against a backdrop of efforts to strengthen sovereign fundamentals and improve investor confidence. The S&P rating upgrade to B with a Stable outlook reflects the assessment that fiscal consolidation has strengthened the country’s financial position. The recognition is significant for Pakistan as sovereign credit assessments influence perceptions of the country’s ability to meet its financial obligations.
The FY26 results therefore mark a notable change in Pakistan’s fiscal trajectory. The fiscal deficit at 2.6 percent of GDP represents the lowest level in 22 years, while the primary surplus of 2.9 percent of GDP is the strongest in at least 26 years. Combined with three consecutive years of primary surpluses and the 5.2 percentage point improvement in the fiscal deficit over three years, the figures indicate a substantial strengthening of public finances.
The decline in debt growth to a 20-year low, together with improvements in the debt-to-GDP ratio and interest burden, further strengthens the overall fiscal picture. While maintaining these gains will require continued fiscal discipline, the FY26 performance provides Pakistan with a significantly improved starting point for managing its public finances and supporting longer-term economic stability.
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