Imagine Pakistan waking up tomorrow with no public debt. No domestic rollover pressure. No external repayment anxiety. No markup bill consuming the budget. For a country where fiscal policy often begins with the question of how to service past borrowing, such a morning would feel like economic freedom.
TAX REFORMS
Imagine Pakistan waking up tomorrow with no public debt. No domestic rollover pressure. No external repayment anxiety. No markup bill consuming the budget. For a country where fiscal policy often begins with the question of how to service past borrowing, such a morning would feel like economic freedom.
But the harder question is not what Pakistan would do without debt. The harder question is whether Pakistan would avoid creating the same debt again.
Pakistan’s latest fiscal numbers offer a rare moment of relief, but also a warning. In 9MFY2025-26, the fiscal deficit declined to 0.7 per cent of GDP, from 2.6 per cent a year earlier. While budgetary estimates projected 3.9 per cent of GDP for FY26. More importantly, the primary balance -- the budget position before interest payments -- recorded a surplus of 3.2 per cent of GDP. These numbers suggest that fiscal consolidation is possible. Yet they do not prove that Pakistan’s fiscal structure has been permanently repaired.
The longer record is less comfortable. Pakistan’s primary balance has recently turned positive, but over the last two decades, it has mostly been negative. Between FY2005 and FY2023, the cumulative primary balance stood at roughly -27.6 per cent of GDP. Put differently, even before counting interest payments, Pakistan’s recurring fiscal behaviour could have added debt equal to more than one-quarter of GDP.
This is why debt relief alone cannot solve Pakistan’s economic problem. It would reset the balance sheet, but it would not repair the fiscal machinery that keeps producing deficits. If Pakistan’s entire debt were waived, the country would gain major fiscal space immediately. But if old primary deficits returned, the government would again begin borrowing from a clean balance sheet. Debt would not disappear permanently; the cycle would simply restart from zero.
The problem lies in Pakistan’s basic fiscal structure: revenues have generally remained too low while spending commitments have remained too high. For the first time in the last decade, FY2026 estimates suggest that total revenue may be broadly equal to non-interest expenditure; otherwise, in most previous years, revenue remained below expenditure even before accounting for markup payments.
For FY2026, defence expenditure is estimated at 2.0 per cent of GDP, development expenditure at 2.3 per cent, and non-interest, non-defence expenditure at 11.5 per cent. Together, these amount to 15.8 per cent of GDP. Total revenue also stands at 15.8 per cent of GDP. This means that before accounting for interest payments, the entire revenue base is already consumed by non-interest obligations, leaving virtually no fiscal space for debt servicing or additional spending.
A debt-free Pakistan would therefore gain relief, but not fiscal stability. Lasting stability would require three changes: stronger tax revenue, more predictable non-tax revenue and tighter control over recurring expenditure.
Pakistan’s tax problem is not simply low rates. It is a weak tax system that is difficult to comply with and easy to evade. Georgia offers a useful lesson. After 2003, it simplified taxation, reduced administrative discretion, improved compliance, expanded taxpayer education, and made the system more business-friendly. Its tax revenue rose from 10.9 per cent of GDP in 2003 to 24.2 per cent in 2008 and has remained close to 24 per cent. For Pakistan, durable revenue mobilisation requires simpler rules, fewer exemptions, digital enforcement, taxpayer trust and a broader base that brings undertaxed sectors into the system.
Non-tax revenue also needs reform. Pakistan should make it more predictable, not merely a temporary budget patch. At present, it relies on sources such as State Bank of Pakistan profits, petroleum levies, dividends, royalties, PTA profits and gas surcharges
Non-tax revenue also needs reform. Pakistan should make it more predictable, not merely a temporary budget patch. At present, it relies on sources such as State Bank of Pakistan profits, petroleum levies, dividends, royalties, PTA profits and gas surcharges. In July-March FY2025, non-tax revenue rose by 68 per cent to Rs4.23 trillion, mainly due to SBP profit and the petroleum levy. The challenge is to move from one-off non-tax gains toward a rules-based model of public-asset income.
Singapore offers a useful example with its Net Investment Returns Contribution (NIRC), which allows the government to draw on a portion of the long-term investment returns from national reserves while preserving the remainder for the future. For FY2026, the estimated NIRC is S$28.48 billion, or about 17.4 per cent of total revenue, demonstrating how well-managed public assets can become a stable budgetary resource rather than a one-off fiscal patch.
The UAE also offers a useful lesson. Dubai’s Investment Corporation of Dubai shows the scale that state-owned investment arms can achieve, with annual revenue reported at around $98 billion. Abu Dhabi’s Mubadala also demonstrates the value of professionally managed public assets, with its domestic portfolio contributing around $12.2 billion to the economy.
These examples show how public assets can become stable sources of fiscal strength when managed professionally. The lesson for Pakistan is not to claim that such entities directly finance a fixed share of government revenue, but to recognise that well-managed public assets can generate dividends, investment income, jobs, and long-term fiscal resilience.
For Pakistan, petroleum levies, SOE dividends, spectrum fees, royalties, and other public-asset income should be governed transparently and converted into predictable revenue streams, rather than used as one-off fiscal relief.
Expenditure discipline is the third test. Ireland offers a useful example of how recurring spending can be rationalised without relying only on higher taxes. In the late 1980s, the country restored fiscal credibility by restraining public-sector spending, controlling transfers, and reducing inefficient state support. Over time, this discipline helped narrow fiscal deficits and rebuild investor confidence.
Ireland’s general government final consumption expenditure fell from above 22 per cent of GDP in the early 1980s to around 12 per cent after 2015 and has remained broadly stable since. For Pakistan, the lesson is clear: debt relief would create fiscal space, but lasting stability requires item-by-item reform of pensions, untargeted subsidies, SOE losses, administrative costs and inefficient grants.
A debt-free Pakistan, then, would not be the end of the country’s fiscal problem. It would be the beginning of a test. The real measure of success would be whether the state uses that breathing space to build a broader and easier-to-comply-with tax system, convert non-tax receipts into predictable public-asset income, and control recurring expenditure before it again exceeds recurring revenue. This matters beyond Pakistan’s budget books. A fiscally constrained Pakistan has less room to invest in growth, climate resilience, connectivity and regional trade.
The lesson from international experience is not that Pakistan should copy any one country. It is that fiscal space must be built, protected and institutionalised. Tax reform should enable the state to collect more without simply punishing those already in the net. Non-tax revenue should come from transparent management of public assets, not temporary windfalls. Expenditure control should protect development spending while reducing routine inefficiencies.
Without these reforms, debt relief would only reset the clock. With them, it could become the foundation of lasting economic sovereignty.
The writer is a Lahore-based economist working as a research associate at the Centre of Economic Planning and Development (CEPD), Minhaj University Lahore, Pakistan.
