KARACHI: Pakistan closed fiscal year 2026 with its strongest fiscal performance in more than two decades, reporting a deficit of 2.6% of GDP, the lowest level in 22 years, according to provisional data released by the Ministry of Finance.
The fiscal deficit narrowed to Rs3.31 trillion in FY26, a significant improvement from Rs6.17 trillion, or 5.4% of GDP, recorded in FY25. The country also achieved a primary surplus of Rs3.63 trillion, equivalent to 2.9% of GDP, representing the highest primary surplus in at least 26 years and surpassing the International Monetary Fund target of 2.5% for the fiscal year.
Three Consecutive Surpluses
The fiscal year marks the third consecutive year of primary surpluses, reflecting sustained fiscal discipline on the expenditure side. The primary surplus improved from 0.9% of GDP in FY24 to 2.4% in FY25 before reaching the record 2.9% in FY26. Over the past three years, the fiscal deficit has narrowed by 5.2 percentage points, while the primary balance shifted from a 1% deficit to a record surplus.
“Pakistan’s fiscal performance demonstrates a significant turnaround from recurring fiscal stress toward stronger public finances, stability and sustainable growth,” said Adviser to the Finance Minister Khurram Schehzad, who shared the figures on social media platform X.
Drivers of Improvement
The improvement was primarily driven by a 4% decline in total expenditures, largely attributed to a 22% reduction in interest expenses. The average yield on Treasury bills during FY26 was 11.03%, compared to 13.63% in FY25. Interest expenses dropped from approximately Rs8.9 trillion to Rs6.9 trillion, representing a nearly Rs2 trillion reduction in a single year.
Excluding interest expenses, overall expenditures increased by 5.6% YoY in FY26, remaining below total revenue growth of 10%. Subsidies and grants expenses declined by 29% YoY to Rs1 trillion.
Debt Profile Improves
Pakistan’s debt growth slowed to 7.7% in FY26, its lowest pace in 20 years, compared to the 16% average over the past two decades. The debt-to-GDP ratio declined to 68% from 75% in FY23, while external debt fell to around 31% of total public debt, its lowest level in nine years.
“Debt is growing at its slowest pace in two decades, debt-to-GDP is declining, external exposure is at a nine-year low, servicing costs are down, maturities are lengthening, and reserve buffers have strengthened,” Schehzad said. He noted that the government retired Rs4.72 trillion in debt before maturity during the fiscal year.
External Financing and Outlook
The deficit was financed through a combination of domestic and external sources. Domestic banks provided Rs2.2 trillion in financing, while non-bank financing saw retirement of Rs99 billion. External financing increased by Rs1.2 trillion, and privatization proceeds of Rs4 billion were also recorded.
Shankar Talreja, CFA at Topline Research, expects the fiscal deficit to widen to 3.6% of GDP in FY27, with the primary surplus projected at 2.0%.
Rating Upgrade
Standard & Poor’s upgraded Pakistan’s sovereign rating to B/Stable, citing the stronger fiscal consolidation and improving sovereign fundamentals. The upgrade reflects growing recognition by international financial institutions of Pakistan’s economic reforms.
