Pakistan posts multi-decade low fiscal deficit of 2.61% of GDP in FY26
Pakistan recorded a multi-decade low fiscal deficit of 2.61% of gross domestic product (GDP), equivalent to Rs3.3 trillion, in fiscal year 2025-26, compared with 5.4% of GDP, or Rs6.2 trillion, a year earlier.
Intelligence analysis by Llama
Pakistan's fiscal deficit has reached a multi-decade low of 2.61% of GDP in FY26, with a primary surplus of 2.9% of GDP. The country's improved fiscal management and reduced government interest expenses have contributed to this achievement.
Pakistan has reduced its fiscal deficit, which is the difference between what the government spends and what it earns, to a multi-decade low of 2.61% of its GDP. This is a good thing because it means the government is being more careful with its money and not spending too much.
Analysis
Fiscal Deficit Reduction: A Multi-Decade Low Achieved by Pakistan
Pakistan has achieved a multi-decade low fiscal deficit of 2.61% of gross domestic product (GDP) in fiscal year 2025-26, compared with 5.4% of GDP, or Rs6.2 trillion, a year earlier. This reduction in the fiscal deficit is a significant achievement for the country, indicating improved fiscal management and a significant reduction in government interest expenses.
The fiscal deficit was financed through a combination of domestic and external sources. Banks provided Rs2.2 trillion in domestic financing, while non-bank financing recorded a net retirement of Rs99 billion. Privatization proceeds amounted to Rs4 billion during the fiscal year, while external financing increased by Rs1.2 trillion.
The primary surplus exceeded the International Monetary Fund's target of 2.5% of GDP for FY26. During the fourth quarter of FY26, the fiscal deficit stood at 1.9% of GDP, down from 2.8% in the same period a year earlier. The primary deficit during the quarter was 0.4% of GDP, compared with 0.7% in the fourth quarter of FY25.
The reduction in the fiscal deficit is a result of improved fiscal management and a significant reduction in government interest expenses. The average yield on Treasury bills during FY26 stood at 11.03%, compared with 13.63% in FY25. Excluding interest payments, total expenditure increased 5.6% year-on-year, remaining below the 10% growth in total government revenue.
The government's efforts to reduce the fiscal deficit and achieve a primary surplus are a positive step towards stabilizing the country's economy. The achievement of a multi-decade low fiscal deficit is a significant milestone for Pakistan and indicates the country's commitment to fiscal discipline.
Key points
- Pakistan has achieved a multi-decade low fiscal deficit of 2.61% of GDP in FY26.
- The fiscal deficit was financed through a combination of domestic and external sources.
- The primary surplus exceeded the International Monetary Fund's target of 2.5% of GDP for FY26.
- The average yield on Treasury bills during FY26 stood at 11.03%, compared with 13.63% in FY25.
If this trend continues, Pakistan's economy may experience a period of stability and growth, with improved fiscal management and reduced government interest expenses contributing to a more favorable economic environment.
However, there are also risks associated with this development, including the potential for inflation to rise if the government's efforts to reduce the fiscal deficit are not accompanied by corresponding increases in revenue.
