The fragility behind the fiscal gains
EDITORIAL: The finance ministry’s summary of fiscal operations for 2025-26, published on August 13, offers welcome evidence of an improvement in Pakistan’s financial position, with the fiscal deficit falling to a 22-year low of 2.6 percent of GDP, or Rs3.3 trillion. The progress rests on a combined provincial surplus of Rs1.449 trillion, Rs1.967 trillion in savings on domestic debt servicing and…
The finance ministry's fiscal report for 2025-26 revealed a 22-year low fiscal deficit of 2.6 percent of GDP or Rs3.3 trillion. This success is attributed to a provincial surplus of Rs1.449 trillion, savings on domestic debt servicing amounting to Rs1.967 trillion, and increased petroleum levy collections. The government's primary surplus added Rs3.634 trillion, equivalent to 2.9 percent of GDP.
Although these figures portray a more stable economic situation, a 22-year-low deficit is still significant when considering Pakistan's massive accumulated debt and narrow revenue base. The fiscal improvement largely came from provincial surpluses, debt servicing savings, and expenditure restraint, rather than from the government's revenue mobilization.
Although Pakistan's sovereign credit-rating was upgraded to 'B' by S&P Global Ratings, it is still below investment grade, making it harder to attract foreign capital that demands a steeper risk premium. The government needs to ensure sustained reductions in the fiscal deficit through long-term revenue mobilization and reduced spending to improve the investment climate.
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