Fitch Rating’s review of Pakistan’s budget for FY2026-27 contains some troubling forecasts. While the global credit rating agency sees the budget as maintaining a clear commitment to fiscal discipline under the IMF programme, it also notes that the country has relied heavily on expenditure compression, particularly cuts to capital spending, in order to meet fiscal goals. The review argues that while this has supported short-term deficit reduction, persistently low capital expenditure could weigh on medium-term economic growth, future revenue mobilisation, and complicate debt dynamics. The lack of development spending was a major theme in the lead-up to the budget, as were the country’s increasingly alarming development outcomes. Pakistan’s poverty rate now stands at 28.9 per cent, a major reversal from a historic low of 21.9 per cent in 2018-19. Unemployment has reached 7.1 per cent and over 25 million children are out of school. Meanwhile, education spending is at a mere 0.8 per cent of GDP. As per the review, achieving the budget’s primary surplus target of 2.0 per cent of GDP will require sustained revenue over-performance relative to historical trends, which it views as challenging given the weaknesses in tax administration and limited new tax measures.
The FY2026-27 tax revenue target of 10.6 per cent of GDP will be a record, and Fitch expects non-tax revenues to decline in the coming fiscal year, while the scope for further spending reductions is narrowing. The reliance on large provincial surpluses is seen as uncertain, given historical variability and coordination challenges between the federal and provincial governments. Tied into all of this are Pakistan’s high interest costs, with the budget’s interest/revenue ratio projected at 39.1 per cent, substantially above the 12.1 per cent median among countries with a similar credit rating. The picture that emerges is of a country over-reliant on spending suppression to plug gaps created by poor revenue collection and meet fiscal goals. With spending tied up and very high interest costs, it is growth and development that pay the price. While the budget did offer significant relief through tax cuts and pension and salary hikes, one must question whether this will be enough when faced with rising inflation. Federal government employees and several trade unions have already protested against the 7.0 per cent salary increase announced in the budget, and given that inflation has surged into the double-digits, one can understand why.
A lot seems to be riding on tax collection getting better and energy prices coming down for Pakistan to meet its economic goals. While the latter does seem to be materialising, due in no small part to this government’s efforts, the former remains uncertain. Amidst this formidable challenge, one thing that might help is the government’s renewed call for a Charter of Economy (CoE). While the PTI has reportedly ruled out its involvement in such a charter for now, the idea has a lot of wisdom. Depending on how it is framed, issues like the relationship between the provinces and the centre regarding revenues no longer need to be a source of uncertainty. Indeed, some experts have called for turning the one-off financial transfer from provinces to the centre that this budget saw into a multi-year, formula-based commitment. These are the kinds of things that CoE could do and they would help bring a lot of clarity to the revenue picture. A stronger economic consensus might also give investors and creditors more confidence and help lower borrowing costs. Pakistan’s economic challenges are quite significant even when everybody is on the same page. What it cannot afford is a lack of political consensus on economic matters that upends even the stability gained thus far. The last-minute delay to this year’s budget was worrying and similar issues could seriously cost the country going forward.
