IMF sees Pakistan’s debt burden easing, but fiscal deficit still above target

Pakistan’s debt-to-GDP ratio has started to decline gradually, according to the International Monetary Fund’s (IMF) newly released Fiscal Monitor Report 2025, signaling cautious optimism for the country’s long-term fiscal stability even as budget deficit concerns persist in the near term.

The report, which includes comprehensive data on fiscal deficits, revenues, expenditures, and debt trends, forecasts a slight drop in Pakistan’s public debt-to-GDP ratio from 71.6% last year to 71.3% in FY25. Over the next five years, the IMF projects a more significant decline to 60.2% by 2030, assuming fiscal discipline and structural reforms continue.

“There is a gradual decline projected in Pakistan’s debt burden relative to GDP, which reflects improved macroeconomic management and reforms under the IMF programme,” the Fund noted.

Budget deficit to exceed target

Despite progress on the debt front, the IMF warned that Pakistan’s fiscal deficit is expected to exceed initial targets this year.

The fiscal shortfall is now projected at 4.1% of GDP, slightly above the government’s budgeted target of 3.9% for FY25.

However, the Fund is optimistic that Pakistan can gradually narrow this gap. The fiscal deficit is forecast to decline to 2.8% of GDP over the next five years if fiscal reforms stay on track.

The primary balance, which excludes interest payments, is expected to perform slightly better than expected, reaching 2.5% of GDP in FY25, compared to an earlier estimate of 2.4%. However, the primary surplus may narrow to 2.0% in the next fiscal year, according to IMF projections.

Government revenue and spending trends

Pakistan’s total government revenue is projected to rise to 16.2% of GDP this year, up from 15.7% last year, driven by tax reforms and improved compliance measures under the ongoing IMF program.

On the expenditure side, total government spending is estimated to remain elevated at 20.4% of GDP in FY25. However, the IMF expects this ratio to decline modestly to 19.6% in FY26, as part of Pakistan’s fiscal consolidation strategy.

IMF agreement and reforms

The release of the Fiscal Monitor comes days after Pakistan reached a Staff-Level Agreement (SLA) with the IMF on October 14, under the $7 billion Extended Fund Facility (EFF) and the $1.4 billion Resilience and Sustainability Facility (RSF).

The agreement, completed just six days after the IMF mission concluded its visit to Islamabad, reflects Islamabad’s progress in meeting quantitative and structural benchmarks.

Once the SLA is approved by the IMF Executive Board—expected within 4-6 weeks—Pakistan will receive a $1.2 billion disbursement, comprising $1 billion under the EFF and $200 million under the RSF.

The IMF commended Pakistan’s commitment to fiscal reforms, tight monetary policy to control inflation, and initiatives to address energy sector inefficiencies and climate resilience.

While challenges remain, including inflationary pressures, high borrowing costs, and slow GDP growth, the latest IMF data suggests that Pakistan is on a gradual path toward fiscal sustainability, provided it stays committed to reform implementation.