Pakistan’s efforts to reduce its budget deficit through aggressive spending cuts could hurt economic growth in the coming years, according to Fitch Ratings, which cautioned against relying too heavily on lower development spending to achieve fiscal targets.
In its review of the federal budget for FY2026-27, Fitch said Pakistan remains committed to fiscal discipline under the International Monetary Fund programme, targeting a primary surplus of 2 percent of GDP and an overall fiscal deficit of 3.6 percent of GDP.
However, the rating agency noted that recent fiscal consolidation has largely been achieved through expenditure compression, particularly cuts in capital spending. While this strategy has helped narrow the deficit in the short term, Fitch said it would be difficult to sustain over the medium term.
“Persistently low capital expenditure may weigh on medium term economic growth, limit future revenue mobilisation, and complicate debt dynamics,” Fitch said, adding that the room for further spending cuts is narrowing as expenditure pressures begin to rise.
Fitch also described Pakistan’s FY2026-27 tax collection target as challenging, citing structural weaknesses in tax administration and a limited pipeline of new tax measures. The agency noted that federal tax collections in FY2025-26 are expected to fall short of official targets despite improved performance.
The agency further highlighted risks associated with the government’s reliance on provincial budget surpluses, which have historically been volatile and dependent on coordination between federal and provincial authorities.
Fitch said Pakistan’s debt servicing burden remains elevated due to a large stock of short term domestic debt and relatively high borrowing costs. Interest payments are projected to consume 39.1 percent of government revenues in FY2026-27, significantly higher than the median ratio of 12.1 percent among countries with a similar ‘B’ credit rating.
Pakistan currently holds a B- rating with a stable outlook from Fitch.
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