Pakistan's budget deficit set to fall to 21-year low of 3.6% of GDP in FY26: report

Pakistan's budget deficit is projected to decline to 3.6% of gross domestic product (GDP) in fiscal year 2025-26, the lowest level in 21 years, reflecting tighter fiscal management under the ongoing International Monetary Fund (IMF) programme, according to Topline Securities.

The projected deficit compares with 5.4% of GDP recorded in FY25 and comes amid efforts by the government to contain expenditures while improving revenue collection.

The brokerage firm said the expected improvement in fiscal balance is driven by a restrictive fiscal policy under the IMF programme, supported by controlled expenditure growth and an increase in both tax and non-tax revenues.

The State Bank of Pakistan's transfer of ₨2.4 trillion in profit to the federal government played a significant role in achieving the projected fiscal deficit.

According to the Ministry of Finance, the fiscal deficit narrowed by 0.7 percentage points of GDP during the first nine months ended March 31, 2026. The primary surplus, which excludes interest payments on debt, stood at 3.2% of GDP during the period.

The ministry's fiscal report showed that higher central bank profits, a 45% increase in Petroleum Development Levy (PDL) collections to ₨1.2 trillion in the first nine months of FY26, and lower debt servicing costs contributed to the government's fiscal performance.

The report stated that savings of ₨1.495 trillion in domestic debt servicing were achieved compared with the corresponding period of FY25 due to cash management measures and the early retirement of ₨1.9 trillion in domestic debt.

Analysts also cited improvements in tax collection relative to economic output as a factor behind the fiscal consolidation. According to estimates, the tax-to-GDP ratio has increased by around 150 basis points during the ongoing IMF programme.

Despite the improvement in fiscal indicators, tax collection remains below target. The Federal Board of Revenue (FBR) provisionally collected ₨11.227 trillion during July-May FY26 against a downward revised target of ₨12.095 trillion, leaving a shortfall of ₨868 billion.

The FBR's annual target was revised downward from ₨14.307 trillion to ₨13.979 trillion during the fiscal year, a reduction of ₨328 billion.

To meet the revised annual target, the tax authority would need to collect approximately ₨2.752 trillion during June 2026, the final month of the fiscal year.