Pakistan FY27 budget faces pressure from ambitious tax target, higher costs: ADB

Pakistan’s fiscal 2027 budget seeks to support economic activity while maintaining fiscal discipline under the International Monetary Fund program, but ambitious revenue targets and rising defense and interest costs could constrain room for growth-enhancing spending, the Asian Development Bank said.

The budget targets a consolidated fiscal deficit of 3.6% of gross domestic product and a primary surplus of 2% of GDP. The primary-surplus target is aligned with Pakistan’s IMF program.

The fiscal strategy relies on stronger revenue mobilization and selective expenditure restraint, while measures aimed at supporting growth include revised income-tax slabs, a lower super tax, reduced property transaction taxes and tariff cuts on industrial inputs.

How ambitious is Pakistan’s FY27 tax target?

Federal Board of Revenue collections are targeted to increase 17.6% in FY2027, lifting FBR tax revenue to 10.6% of GDP from 10.2%, according to the ADB.

The budget sets FBR revenue at PKR 15.264 trillion, 17.6% above the previous fiscal year.

The revenue target is supported by administrative reforms, including the establishment of a National Faceless Centre for technology-driven faceless audits and assessments, alongside efforts to broaden the tax base. FBR legislation provides for electronic communication and algorithmic assignment of functions under the new system.

Tax measures intended to ease the burden on households and businesses could improve competitiveness, but their revenue cost would need to be offset through stronger compliance and enforcement.

ADB described the FBR target as ambitious, noting that revenue shortfalls in previous years had required expenditure adjustments during the fiscal year.

Why could higher spending put the budget under pressure?

Defense spending is projected to rise 16% in FY2027, while interest payments are expected to increase because of a larger outstanding debt stock and higher borrowing costs.

Lower power-sector subsidies and smaller provincial development programs are expected to partly offset those pressures.

ADB said the reduction in provincial development spending reflects a compression of provincial resources through a reverse transfer to the federal government under Article 164 of the Constitution rather than a fundamental shift away from development expenditure.

If revenue targets are missed, the government could again be forced to cut spending during the year, leaving less fiscal space for public investment that could support economic growth.

How did Pakistan’s fiscal position change in FY2026?

Pakistan’s consolidated fiscal deficit narrowed to 2.6% of GDP in FY2026 from 5.4% a year earlier, while the primary surplus reached 2.9% of GDP, exceeding the IMF EFF projection of 2.6%, according to the ADB.

Separate fiscal data confirm that the overall deficit fell to 2.6% of GDP and the primary surplus reached 2.9% in FY2026.

The improvement came largely from lower interest costs rather than a significant expansion of the tax base.

FBR collections increased 10.8% year-on-year in FY2026, slowing sharply from 26.1% growth in FY2025 and falling about PKR 969 billion short of the EFF program benchmark, according to the ADB.

FBR revenue remained at 10.2% of GDP, indicating limited progress in broadening the tax base.

Non-tax revenue accounted for 4.4% of GDP, supported by higher Petroleum Development Levy collections and State Bank of Pakistan profit transfers.

How much did lower interest costs help?

Total government expenditure declined to 18.2% of GDP in FY2026 from 21.1% a year earlier.

Interest payments fell to 5.5% of GDP from 7.7%, with lower borrowing costs providing much of the improvement in the fiscal position. Fiscal data show mark-up payments fell 22% year-on-year to PKR 6.948 trillion.

Non-interest current expenditure nevertheless increased in absolute terms, while defense spending rose 18%.

Development expenditure remained broadly stable as a share of the economy.

How has Pakistan’s access to external financing changed?

Pakistan returned to international capital markets during FY2026, raising USD 750 million through a Eurobond and issuing its first CNY 1.75 billion Panda bond in April and May.

The Panda bond was worth about USD 258 million at issuance, according to the ADB.

The new issuance did not fully offset external bond repayments, including USD 500 million in September 2025 and USD 1.4 billion in April 2026, resulting in net portfolio outflows of USD 1.2 billion, according to the ADB.

Pakistan also refinanced a significant portion of maturing bilateral deposits through fresh placements, while multilateral and bilateral program disbursements anchored by the IMF program remained an important source of external financing.

Where did Pakistan’s foreign exchange reserves stand?

Gross international reserves increased to USD 18.5 billion at the end of June 2026 from USD 14.5 billion a year earlier, according to the ADB.

The increase lifted import cover to about 2.9 months and strengthened Pakistan’s external liquidity position.

Pakistan subsequently received sovereign rating upgrades from S&P in July and Moody’s in August, alongside its renewed access to international financing.

What could derail the FY27 fiscal targets?

ADB said Pakistan’s medium-term fiscal outlook will depend heavily on sustained implementation of reforms under the IMF program.

Stronger tax administration, greater fiscal transparency and more efficient public spending could improve fiscal credibility and reduce financing pressures.

Failure to meet the FBR revenue target, however, could force further expenditure cuts and squeeze public investment.

The fiscal outlook is also vulnerable to higher borrowing costs, external financing pressures and further economic disruption from the Middle East conflict.

The IMF has separately said the FY2027 fiscal strategy should be supported by a broader tax base, stronger tax administration and greater spending efficiency while delivering a 2% primary surplus.

The FY2027 budget therefore leaves the government balancing tax relief and measures intended to support private activity against demanding revenue targets, higher debt-servicing costs and limited room for additional spending.