By Abdul Ghani

Pakistan’s fiscal deficit narrowed sharply to 2.6% of GDP in FY2026, the lowest level in more than two decades, as revenues increased, expenditures declined and lower markup payments eased pressure on public finances.

According to the Finance Division’s Monthly Economic Update & Outlook – August 2026, available with Wealth Pakistan, the fiscal deficit fell to Rs3.313 trillion, or 2.6% of GDP, from Rs6.168 trillion, or 5.4% of GDP, in the preceding fiscal year.

The improvement was accompanied by a stronger primary balance. Pakistan recorded a primary surplus of Rs3.634 trillion, equivalent to 2.9% of GDP, compared with Rs2.719 trillion, or 2.4% of GDP, a year earlier.

The Finance Division said this marked the third consecutive annual primary surplus, while prudent expenditure management and lower markup payments contributed significantly to the improved fiscal outcome.

Total government revenue increased 9.9% to Rs19.774 trillion during FY2026. At the same time, total expenditure declined 4.5% to Rs23.087 trillion, helping substantially reduce the gap between government income and spending.

A major factor behind the expenditure reduction was lower debt-servicing pressure. Current expenditure declined 3.91%, mainly because markup payments fell 21.8% during the year.

The decline in current spending did not translate into lower development expenditure. In contrast, development expenditure increased 14.9%, which the Finance Division noted stimulated economic growth.

The combination of rising revenues, lower overall expenditure and a sharp reduction in markup payments helped cut the fiscal deficit by almost half as a share of GDP, from 5.4% to 2.6%.

The improvement in fiscal indicators came alongside a recovery in economic activity. Large-scale manufacturing expanded 4.98% during FY2026, compared with a contraction of 0.7% in the previous year, with growth recorded in 16 of 22 industrial sectors.

Revenue collection continued to increase at the start of the new fiscal year. The Federal Board of Revenue collected Rs820.9 billion in taxes in July 2026, up 8.4% from Rs757.4 billion in the corresponding month of the previous year.

Direct tax collection grew 3%, while indirect taxes increased 11.9%. Within indirect taxes, sales tax receipts rose 18.3% and federal excise duty collection increased 3.4%, although customs duties declined 2.4%.

The Finance Division expects the economy to maintain its recovery momentum in the coming months, supported by stronger macroeconomic fundamentals, continued fiscal discipline and a stable financial environment.

It stressed that maintaining policy discipline and advancing structural reforms would remain important for sustaining inclusive growth, strengthening resilience to external shocks and preserving the gains made in macroeconomic stability.

Credit: INP-WealthPk