Fitch sees Pakistan’s FY27 budget aligned with IMF goals

Fitch Ratings said Pakistan’s budget for the fiscal year ending June 30, 2027 (FY27) maintains a clear commitment to fiscal discipline under the IMF’s Extended Fund Facility, targeting a primary surplus of 2% of GDP and an overall fiscal deficit of 3.6% of GDP.

The target follows a strong FY26 performance, with a projected primary surplus of 2.5% of GDP driven by aggressive spending cuts and a provincial surplus of 1.1% of GDP, exceeding Fitch’s expectations.

Fitch said the policy momentum improves Pakistan’s near-term fiscal outlook, but the country remains vulnerable to inflation and underperformance in tax collection.

The agency’s fiscal projections remain more cautious than those of the government, highlighting risks to key budget targets.

Achieving the FY27 primary surplus will depend on sustained revenue outperformance relative to historical trends, which Fitch views as challenging given structural weaknesses in tax administration and a limited pipeline of new tax measures.

Federal tax collections in FY26 are officially projected to fall 0.7 percentage points of GDP short of target, underscoring persistent difficulties in meeting ambitious revenue goals. The FY27 tax revenue target of 10.6% of GDP would be a record, building on improved collections in FY26.

Non-tax revenues, including profit transfers from the State Bank of Pakistan, are expected to decline in FY27. Reliance on a large provincial surplus is another source of uncertainty, given historical volatility and coordination challenges between federal and provincial governments.

Amid revenue challenges, fiscal consolidation has relied heavily on expenditure compression, particularly reductions in capital spending, as seen in FY26. While this has supported short-term deficit reduction, Fitch said it will be difficult to sustain as a medium-term strategy.

Persistently low capital expenditure could weigh on medium-term economic growth, limit future revenue mobilisation and complicate debt dynamics. The scope for further spending cuts is narrowing, increasing the trade-off between fiscal adjustment and growth as expenditure pressures rise from a low base.

Interest costs remain structurally elevated due to Pakistan’s large stock of short-maturity domestic debt and high market yields.

The risk of overspending on interest payments could increase if inflation rises because of higher global energy prices, prompting tighter monetary policy. The FY27 budget projects an interest-to-revenue ratio of 39.1%, well above the median of 12.1% for countries rated in the ‘B’ category.

Fitch said the high debt-servicing burden limits fiscal flexibility and crowds out priority spending, representing a key weakness in Pakistan’s ‘B-’ sovereign rating with a Stable Outlook. Pakistan’s overall fiscal deficit of 3.6% of GDP in FY27 also remains above the median of 3% for ‘B’-rated peers.

On the external front, Pakistan’s recent U.S. dollar bond issuance at a yield of just under 7% demonstrates improved access to international capital markets and strengthens near-term liquidity. The country also issued a panda bond in 2026, further improving external market access.

However, Fitch noted that the maturities of recent issuances have been relatively short, at around three years, leaving medium-term external refinancing risks and structural vulnerabilities in Pakistan’s debt profile largely unchanged.

The agency said continued dependence on multilateral financing and support from bilateral partners, particularly China and Gulf Cooperation Council countries, leaves Pakistan exposed to shifts in creditor confidence and foreign-exchange reserve adequacy.

Fitch said fiscal consolidation remains dependent on sustained primary surpluses and stronger revenue performance, with the credibility of budget targets, the sustainability of provincial surpluses, and developments in growth and interest costs remaining central to the success of Pakistan’s IMF programme and future rating assessments.