Pakistan recorded a multi-decade low fiscal deficit of Rs. 3.3 trillion, equivalent to 2.6 percent of GDP, during FY26.
According to fiscal data for FY26, the deficit fell from 5.4 percent of GDP or Rs. 6.2 trillion in FY25 to 2.6 percent of GDP. This is the lowest level since FY18 and the lowest as a percentage of GDP recorded in Pakistan’s history, according to Arif Habib Limited.
The improvement was primarily driven by lower government expenditure, particularly interest payments, alongside stronger revenue growth.
Total government expenditure declined by around 4 percent year-on-year during FY26, while interest expenses fell by 22 percent as lower interest rates and improved debt management reduced the government’s financing burden.
The average yield on Treasury bills during FY26 stood at approximately 11.03 percent, compared with 13.63 percent in FY25.
Excluding interest payments, government expenditure increased by around 5.6 percent, remaining below the roughly 10 percent growth in total revenues.
Pakistan also generated a primary surplus of Rs. 3.6 trillion, or 2.9 percent of GDP, during FY26, compared with Rs. 2.7 trillion or 2.4 percent of GDP a year earlier.
The primary surplus exceeded the IMF target of 2.5 percent of GDP set for FY26.
During the fourth quarter of FY26, the fiscal deficit stood at 1.9 percent of GDP, compared with 2.8 percent in the same quarter of FY25. The primary deficit for the quarter narrowed to 0.4 percent of GDP from 0.7 percent a year earlier.
Interest payments during the fourth quarter amounted to approximately Rs. 2 trillion, down 18 percent year-on-year despite an increase in domestic debt. On a quarter-on-quarter basis, however, interest costs rose 44 percent.
Government spending on subsidies and grants also declined significantly, falling 29 percent year-on-year to around Rs. 1 trillion during FY26.
The fiscal gap was financed through a combination of domestic and external sources. Banks provided around Rs. 2.2 trillion in domestic financing, while non-bank financing recorded a net retirement of approximately Rs. 99 billion.
Privatization proceeds contributed around Rs. 4 billion, while external financing increased by approximately Rs. 1.2 trillion during the year.
Despite the improvement in FY26, fiscal pressures are expected to remain in the coming year.
The fiscal deficit is projected to widen to around 3.6 percent of GDP in FY27, while the primary surplus is expected to moderate to approximately 2 percent of GDP.
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