Farooq Awan

Pakistan’s fiscal position strengthened markedly in FY25, with the deficit falling to its lowest level in nine years on the back of soaring revenues, improved tax discipline, and restrained spending.

According to the State Bank of Pakistan’s Annual Report 2024-25, the fiscal deficit narrowed to 5.4 percent of GDP, compared to 6.9 percent in the previous year, while the primary balance posted a surplus of 2.4 percent, exceeding both the government’s and IMF’s targets.

The turnaround came from a combination of policy consistency and administrative reforms. Tax collection surged by nearly 26 percent, supported by the withdrawal of exemptions, adjustments in rates and duties, and enhanced documentation of the economy. The Federal Board of Revenue reached a multi-year high in tax receipts, with almost equal contributions from direct and indirect taxes.

Total revenue climbed to 15.8 percent of GDP, up from 12.6 percent in FY24. Non-tax receipts also expanded sharply, mainly due to higher State Bank profits and petroleum levies. Provincial tax revenues rose modestly as services-related GST collections improved.

On the expenditure side, the report says the government introduced austerity measures and abolished untargeted gas subsidies for fertilizer plants and domestic consumers, continuing a policy shift toward targeted support. The moderation in interest payments thanks to falling interest rates enabled an increase in development spending, particularly at the provincial level.

Development outlays were focused on construction, transport, and agriculture projects, stimulating employment and industrial demand. Meanwhile, the government lengthened the maturity of domestic debt by issuing more long-term Pakistan Investment Bonds and Sukuk, reducing rollover risk.

Despite the fiscal gains, the public debt-to-GDP ratio rose slightly to 70.8 percent, mainly because nominal GDP growth slowed. However, the improved revenue base and lower borrowing costs strengthened debt-servicing capacity, with solvency and liquidity indicators showing improvement.

The SBP report notes that Pakistan’s fiscal reform path “demonstrates that discipline is achievable even in a challenging macroeconomic context.” The central bank highlighted that reduced dependence on bank borrowing eased pressure on the monetary system, freeing liquidity for private-sector credit growth.

Going forward, the SBP recommends expanding the tax base further, harmonizing federal and provincial tax regimes, and simplifying compliance procedures. It also advocates for governance reforms in state-owned enterprises to reduce their fiscal drain.

The report concludes that “Pakistan’s fiscal trajectory has entered a consolidation phase where consistent reform, not temporary windfalls, will determine sustainability.”

Credit: INP-WealthPk