Pakistan’s efforts to reduce its budget deficit through aggressive spending cuts may come at the cost of slower economic growth, according to Fitch Ratings. In its assessment of the federal budget for FY2026-27, the global rating agency cautioned that relying heavily on reduced development spending to meet fiscal targets could create long-term economic challenges.
Fitch noted that Pakistan remains committed to fiscal discipline under its programme with the International Monetary Fund (IMF). The government has set a target of achieving a primary budget surplus of 2 percent of GDP while limiting the overall fiscal deficit to 3.6 percent of GDP. While these goals demonstrate a focus on financial stability, Fitch warned that the current strategy may become increasingly difficult to sustain.
According to the agency, much of Pakistan’s recent fiscal improvement has been achieved through expenditure compression, particularly by reducing capital and development spending. Although this approach has helped narrow the budget deficit in the short term, persistently low investment in infrastructure and development projects could weaken economic growth, reduce future tax revenues, and complicate debt management over time.
Fitch also described the government’s tax collection target for FY2026-27 as ambitious. The agency pointed to structural weaknesses in tax administration and a limited number of new tax measures as key challenges. Despite improved revenue performance, federal tax collections during FY2025-26 are expected to fall short of official targets, highlighting the difficulties in expanding the tax base.
Another concern raised by Fitch is the government’s reliance on provincial budget surpluses to support overall fiscal objectives. The agency noted that such surpluses have historically been unpredictable and depend heavily on coordination between federal and provincial governments, creating additional uncertainty for budget planning.
Pakistan’s debt burden remains another major challenge. Fitch estimates that interest payments will consume 39.1 percent of government revenues in FY2026-27, significantly higher than the 12.1 percent median for countries with a similar “B” credit rating. The agency attributed this pressure to a large stock of short-term domestic debt and relatively high borrowing costs.
While Pakistan has made progress in improving fiscal discipline, Fitch believes that achieving long-term economic stability will require a balanced approach that combines deficit reduction with sustained investment in development, infrastructure, and revenue-generating reforms.
