Pakistan has made visible progress in improving its fiscal position, but the gains have come with significant economic costs that could limit the durability of the improvement. Since 2022, successive federal budgets have been presented under the premiership of Shehbaz Sharif, with the government’s economic record showing a combination of stronger fiscal discipline and continuing structural weaknesses. Overall public debt and liabilities have reached around Rs98 trillion, equivalent to approximately 77 percent of GDP, while gross public debt has climbed to Rs86.7 trillion, representing an increase of around 76 percent over the past five years. Despite the substantial rise in the absolute level of debt, the debt to GDP ratio has declined from 73.9 percent in FY22 to 68.3 percent, largely because the government has managed to record primary fiscal surpluses for three consecutive years.
The improvement in the fiscal position becomes more significant when the government’s ability to service its debt is considered. In FY22, debt servicing consumed approximately 85 percent of net federal revenues, but the ratio deteriorated sharply to 122 percent in FY23, placing considerable pressure on government finances. The situation began to improve after the government shifted toward generating primary fiscal surpluses, which stood at 0.9 percent of GDP in FY24, 2.4 percent in FY25 and 2.9 percent in FY26. As fiscal balances strengthened, the debt servicing to revenue ratio declined substantially, reaching around 66 percent in FY26. This represents a significant reduction from the level recorded in FY23 and has provided the government with greater fiscal space to manage its financial obligations.
However, achieving these improvements has required difficult policy choices that have affected taxpayers, businesses, workers and broader economic activity. The government increased taxation on an already narrow and uneven tax base in an effort to raise additional revenue, much of which has been required to meet debt servicing obligations. These measures were implemented during a period when monetary policy remained tight and inflation was placing significant pressure on household finances and business costs. At the same time, development expenditure was restrained, reducing the space available for public investment in infrastructure and other productive activities. While these measures contributed to improved fiscal indicators, they also created conditions that could weigh on economic growth and employment generation.
The central concern is therefore not simply whether Pakistan can reduce its debt ratios, but whether the process of fiscal consolidation is supporting productive economic activity. Higher taxation can weaken private investment if businesses face rising costs and reduced incentives to expand, while lower development spending can restrict the infrastructure and public services needed to support productivity. A fiscal position that looks stronger on paper may therefore fail to deliver sustainable economic improvement if the policies used to achieve it suppress investment and growth. The decline in debt to GDP and debt servicing to revenue ratios should consequently be viewed alongside their broader impact on economic activity rather than treated as standalone indicators of success.
Pakistan’s longer term debt history also highlights the importance of how borrowed money is used. The country’s debt to GDP ratio is not exceptionally high when compared with many economies around the world, but Pakistan has historically struggled to convert borrowing into sufficient increases in productivity and income per person. Several countries with higher debt ratios have recorded stronger GDP per capita growth, while Pakistan has remained an outlier in terms of the proportion of government revenue consumed by interest payments. This suggests that the key challenge is not merely the volume of debt but the effectiveness of expenditure financed through borrowing and the ability of the economy to generate returns from those resources.
Pakistan has previously demonstrated that fiscal improvement can provide temporary breathing room. Following a restructuring of government debt in the early 2000s, the country recorded primary fiscal surpluses for six consecutive years between FY99 and FY04. That period provided an opportunity to stabilize public finances, but weaknesses in the use of borrowed resources eventually contributed to another deterioration in the country’s debt dynamics, culminating in renewed financial pressure during 2022 and 2023. The current improvement could similarly provide several years of greater stability and potentially create room for economic expansion, but its long term value will depend on whether the underlying weaknesses that repeatedly push Pakistan back toward fiscal stress are addressed.
A durable improvement requires reforms that extend beyond annual budget targets and headline fiscal ratios. Broadening the tax base should be a central priority so that revenue collection does not continue to depend disproportionately on a limited segment of taxpayers and businesses. At the same time, public spending needs to place greater emphasis on social indicators and productive investment, particularly areas that can improve human capital and economic participation. Reducing unnecessary government involvement in economic activity, strengthening governance, improving institutional performance and increasing national savings would also be important for reducing the economy’s reliance on borrowing and creating stronger domestic sources of investment.
Fiscal surpluses and lower interest rates can create valuable space for policymakers, but they cannot independently generate sustainable economic growth. A strategy based primarily on fiscal tightening and restrictive monetary conditions may stabilize external and fiscal accounts for a period, yet it can also suppress private investment and demand if maintained without complementary productivity measures. Pakistan therefore needs a policy mix that combines fiscal discipline with measures designed to increase output, investment, exports, savings and employment. The objective should be to ensure that economic stabilization creates the foundation for stronger productive activity rather than becoming an end in itself.
The role of the IMF programme also remains significant in the current improvement. Several of the government’s fiscal achievements are closely linked with the requirements and policy framework associated with the programme, including fiscal consolidation, primary surpluses and measures to strengthen public finances. These reforms can help restore confidence and provide access to external financing, but the lasting test will be whether Pakistan can maintain fiscal discipline after programme pressures ease. A sustainable economic model must ultimately rely on stronger domestic revenue generation, productive investment and improved economic competitiveness rather than continued dependence on external adjustment programmes.
The government is likely to emphasize the headline improvements in its fiscal position, including the decline in the debt to GDP ratio, the reduction in debt servicing relative to revenue, lower interest rates, the fiscal deficit reaching a 22 year low and the achievement of consecutive primary fiscal surpluses. These indicators are important and demonstrate that the immediate fiscal position has improved compared with the severe pressures experienced in FY23. However, the more important question is what Pakistan has had to sacrifice to achieve this stabilization and whether those sacrifices could undermine future growth.
The broader economic indicators remain a source of concern. Poverty has increased over the past five years, private and public investment has weakened, and confidence in the country’s ability to maintain long term economic stability has remained under pressure. If fiscal consolidation continues to rely heavily on higher taxation and restrained development expenditure without simultaneously increasing productivity and investment, the country could find itself repeating the same cycle in which temporary stabilization is followed by renewed economic weakness. Pakistan’s fiscal improvement can therefore provide an opportunity, but only if the available fiscal space is ultimately directed toward building a more productive economy.
The challenge ahead is to transform fiscal stability from a temporary achievement into a foundation for sustained economic development. Lower debt servicing pressures and stronger fiscal balances can give policymakers greater room to act, but that space needs to be used to strengthen the economy’s productive capacity. Expanding the tax base, improving governance, raising national savings, encouraging private investment, strengthening social spending and directing resources toward productive activities will be critical to preventing another reversal. Without these structural changes, the recent improvement in Pakistan’s fiscal indicators may offer only temporary relief rather than a lasting solution to the country’s recurring debt and growth problems.
Follow the PakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem.