By Abdul Ghani

Pakistan's fiscal deficit narrowed sharply to 0.7% of GDP, or Rs856.4 billion, during July-March FY2025-26 from 2.6% of GDP, or Rs2.97 trillion, in the corresponding period of the previous fiscal year, reflecting significant progress in fiscal consolidation and macroeconomic stabilization, according to the Pakistan Economic Survey 2025-26 released by the Ministry of Finance.

The substantial reduction in the fiscal deficit represents one of the strongest fiscal performances in recent years and highlights the government's efforts to strengthen public finances by improving revenue mobilization, expenditure management and debt servicing reforms.

According to the survey, the improvement was supported by growth in both tax and non-tax revenues, a decline in markup payments and continued support from provincial governments in maintaining fiscal discipline.

Total revenue increased by 10.7% to Rs14.8 trillion during July-March FY2025-26 compared with the same period last year. Tax revenue rose by 11.3% to Rs10.17 trillion, while non-tax revenue increased by 9.5% to Rs4.63 trillion. The rise in revenues provided additional fiscal space and helped contain the budget deficit despite increased development spending.

The survey notes that tax collection growth was supported by both federal and provincial governments. Federal Board of Revenue collections increased by 10.1% to Rs9.31 trillion, while provincial tax revenues grew by 25.8% to Rs860.7 billion. Higher petroleum levy collections and increased profits transferred by the State Bank of Pakistan also contributed significantly to non-tax revenues.

On the expenditure side, total spending declined by 4.2% to Rs15.66 trillion during the period under review. Current expenditure fell by 2.2% to Rs14.27 trillion, largely due to a significant reduction in debt servicing costs. Markup payments declined by 23.2% to Rs4.95 trillion, providing substantial relief to the federal budget.

The reduction in interest payments reflects the impact of declining interest rates, improved debt management and lower borrowing requirements resulting from stronger fiscal performance.

Despite fiscal consolidation, the government increased development spending during FY2025-26. Development expenditure reached Rs1.95 trillion, registering growth of 26.8% over the corresponding period of last year. Federal development spending increased by 7.6%, while provincial development expenditures rose by 31.6%, indicating continued focus on infrastructure, public services and economic development.

The survey highlights that fiscal consolidation was achieved without compromising priority spending in key sectors. Pro-poor expenditures reached Rs4.66 trillion during July-March FY2025-26, covering education, health, social protection, disaster response, infrastructure development and environmental programmes.

Pakistan's improved fiscal position was accompanied by stronger economic performance. The economy grew by 3.7% during FY2025-26, supported by growth in agriculture, industry and services. Large-scale manufacturing expanded by 6.11%, while private investment increased by 12.8%, helping broaden the revenue base and strengthen fiscal outcomes.

The survey notes that continued fiscal discipline also helped improve debt indicators. Public debt growth remained contained at 3.4% during the first nine months of FY2025-26 compared with 6.7% in the same period last year, supported by a strong primary surplus and prudent borrowing strategy.

According to the Ministry of Finance, the government is continuing fiscal reforms under the National Fiscal Pact framework to strengthen revenue mobilization, improve expenditure efficiency and enhance coordination between federal and provincial governments. These measures aim to create fiscal space for development spending while ensuring long-term debt sustainability.

The survey emphasizes that sustained fiscal consolidation remains essential for maintaining macroeconomic stability, reducing borrowing requirements, improving investor confidence and supporting sustainable economic growth.

With the fiscal deficit narrowing to just 0.7% of GDP during July-March FY2025-26, Pakistan recorded one of its strongest fiscal performances in recent years, reflecting the combined impact of stronger revenues, lower debt servicing costs and consistent fiscal discipline.

Credit: INP-WealthPk