IMF flags rising fiscal risks for Pakistan, projects 3.2% deficit and weakening primary surplus

Pakistan’s fiscal deficit is projected to remain at 3.2 per cent of GDP in both the current and next fiscal year, before following a volatile medium-term path, the International Monetary Fund said in its latest outlook.

The projection was published in the Fiscal Monitor 2026, which warned that while debt ratios are gradually improving, underlying fiscal pressures remain structurally entrenched.

The deficit trajectory is expected to narrow from 5.4 per cent in FY2025 to 3.2 per cent, then ease further to 3 per cent in FY2028 and 2.8 per cent in FY2029, before reversing to 3.6 per cent in FY2030 and widening to 4.6 per cent by FY2031.

The Fund simultaneously flagged a weakening primary balance outlook. Pakistan’s primary surplus is projected at 2.5 per cent of GDP this year, up slightly from 2.4 per cent last year, but expected to decline to 2 per cent next year, remain stable for two years, and then fall sharply to 1 per cent in FY2030 and near-zero at 0.1 per cent in FY2031.

Revenue performance is expected to remain largely flat. The IMF estimates government revenue at 15.8 per cent of GDP this year, slipping to 15.3 per cent next year, and then stabilising at around 15.5 per cent of GDP through the medium-term horizon.

Spending trends show temporary relief driven by lower debt servicing costs. With interest rates falling from about 22 per cent to less than half, expenditure is projected to decline from previous highs to 19 per cent of GDP this year and 18.5 per cent over the next two fiscal years, before rising again toward 20 per cent by FY2031.

Debt indicators show gradual improvement. Gross government debt is projected at 70.1 per cent of GDP this year, down from 72.8 per cent, with a steady decline expected to 67.1 per cent in FY2027, 64 per cent in FY2028, 60.8 per cent in FY2029, 59 per cent in FY2030, and 58.2 per cent in FY2031.

Net debt follows a similar path, falling from 66.5 per cent last year to 64.4 per cent this year, and easing further to around 55 per cent by FY2031.

The IMF, however, cautioned that these improvements remain vulnerable to external shocks and structural weaknesses, particularly persistent spending pressures and limited revenue expansion capacity.

Beyond Pakistan, the Fund highlighted elevated global fiscal risk conditions, driven by geopolitical instability, inflation risks, tighter financial conditions, and commodity market volatility.

Global equity markets have already declined about 8 per cent since February, after earlier gains linked to strong corporate earnings, the report noted.

The IMF warned that prolonged conflict scenarios could intensify global macroeconomic stress through higher energy prices, dollar appreciation, and rising interest rates, all of which disproportionately affect emerging economies.

It further estimated global debt-at-risk at around 117 per cent of GDP within three years, with additional upside risks under adverse scenarios involving prolonged geopolitical conflict or sharp asset price corrections.

Policy guidance emphasised tighter fiscal discipline across economies. The Fund advised against broad-based fuel and energy subsidies, citing their fiscal cost and market distortion effects, and recommended targeted support mechanisms instead.

It also stressed the importance of maintaining central bank independence, strengthening fiscal frameworks, and improving transparency to anchor expectations and support credible consolidation paths.