Rising interest payments, uplift spending strained Pakistan's fiscal position in early FY27: ministry

The Pakistani Ministry of Finance reported on Thursday that rising interest payments and increased development spending pose challenges to the country's fiscal position at the start of fiscal year 27 (FY27). Despite a significant 90% reduction in subsidies, overall fiscal surplus and primary surplus both declined compared to the same period in the previous fiscal year.

The government remains committed to focusing on fiscal stability through revenue strengthening and prudent expenditure management. Tax revenues exceeded expectations, contributing to a federal fiscal surplus of 0.5% of GDP. However, higher-than-targeted expenditure, driven primarily by a surge in development spending and a 69.5% increase in development spending, strained fiscal resources.

The finance ministry also highlighted geopolitical tensions, trade disruptions, and elevated commodity prices as key downside risks while remaining cautiously optimistic about the economy's recovery, supported by improved crop prospects, manufacturing industries, construction activity, and external earnings. The State Bank of Pakistan's decision to increase the policy rate by 50 basis points was deemed necessary to address inflationary pressures resulting from geopolitical tensions and high global energy prices.

The report also noted a significant increase in foreign investments, including a $3 billion Eurobond issue and a net inflow of $2.9 billion in portfolio investments.