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Aftab Maken
ISLAMABAD: Pakistan closed fiscal year 2026 with its strongest set of headline fiscal numbers in over two decades: a fiscal deficit near a 22-year low, a primary surplus at a multi-decade high, and a credit rating upgrade from S&P Global. Government officials have cast the results as proof of a durable turnaround. Economists tracking the numbers closely say the picture is more complicated — and that the toughest reforms are still ahead.
The Headline Numbers
By the government’s own accounting, Pakistan’s fiscal deficit fell to roughly 2.6–3.6% of GDP in FY26 (estimates vary slightly by source), down from 7.9% in FY22. The primary surplus — the budget balance before interest payments — came in at around 2.9–3.2% of GDP, marking a third consecutive year in surplus. Debt growth slowed to its lowest pace in 20 years, and S&P upgraded Pakistan’s sovereign rating to ‘B’ with a stable outlook, citing improved fiscal consolidation.
Where the Money Actually Came From
A closer look at the Ministry of Finance‘s own data shows a significant share of the improvement came from sources that are unlikely to repeat. Topline Research Director Shankar Talreja told Business Recorder that a Rs 2.4 trillion profit transfer from the State Bank of Pakistan “played a key role” in the 21-year-low deficit figure. A 45% jump in the petroleum development levy, to Rs 1.2 trillion, and savings from the early retirement of Rs 1.9 trillion in domestic debt also did heavy lifting. None of these are structural revenue gains from a broadened tax base.
Cracks Beneath the Surface
The State Bank’s own monetary policy commentary flagged that exports missed targets by $5.2 billion in FY26 — a shortfall that has kept pressure on the trade deficit and deepened reliance on remittances rather than export earnings.
That dependence shows up starkly in the external accounts. Pakistan posted a near-balanced current account for FY26 (a deficit of just $139 million), but only because a $35.5 billion goods-and-services trade deficit was almost entirely offset by $41.6 billion in workers’ remittances — a record figure. A recent report cited by Business Recorder concluded the improvement is “largely driven by record remittance inflows rather than a meaningful expansion in exports or productivity,” raising questions about how sustainable the gains really are.
Foreign direct investment, meanwhile, fell roughly 31% year-on-year in the first ten months of FY26. Inflation jumped from 7.3% in March to nearly 11% in April, prompting the State Bank to raise its policy rate by 100 basis points in April — its first hike since 2023 — after the Iran-US conflict pushed up energy import costs.
Not every rating agency shares S&P’s optimism. Fitch kept Pakistan at ‘B-‘ in April 2026, projecting a narrower primary surplus of 2.1% of GDP and debt-to-GDP still near 69%, which it described as “well above peers.”
Economists: “Another Stabilisation Budget”
With the FY27 budget now in place, Pakistani economists have been blunt about what it does and doesn’t achieve. Dr. Sajid Amin Javed of the Sustainable Development Policy Institute (SDPI) and Dr. Afia Malik, formerly of the Pakistan Institute of Development Economics (PIDE), told The Express Tribune that the budget “largely fulfilled” Pakistan’s IMF commitments but offered “limited progress on deeper reforms needed to place the economy on a higher and more sustainable growth path.”
Malik described it as “another stabilisation budget” — one that preserves fiscal discipline but shows only modest ambition on productivity, competitiveness, and investment-led growth. Both economists said the next six to twelve months would be decisive in determining whether Pakistan can convert stabilization into actual expansion, and both said the budget missed a chance at meaningful tax reform — an opportunity, Javed argued, that existed even within IMF constraints, through measures like a stronger digital tax regime for retailers and wholesalers and taxing previously undocumented segments of the economy.
The Tax Fairness Question
A recurring theme in Pakistani economic commentary is that the country’s revenue gains are coming disproportionately from ordinary consumers rather than from undertaxed elites. In a Business Recorder opinion piece, tax analysts Huzaima Bukhari, Dr. Ikramul Haq, and Abdul Rauf Shakoori argued that Pakistan’s tax system “punishes formalization and incentivizes concealment,” and called for a shift in FY27 policy from taxing production toward taxing “unearned wealth accumulation” and speculative rent-seeking in real estate and stock trading.
Separate analysis estimated that sales tax, sales-tax-mode withholding taxes, and the petroleum levy together will extract roughly Rs 11.8 trillion from the public in FY27 — a figure commentators say “undermines the adequacy” of the Rs 838 billion budgeted for the Benazir Income Support Programme, given a poverty rate estimated at 44% by calorific measurement.
Not all reaction has been critical. Waqas Ghani, Head of Equity Research at JS Global Capital, welcomed relief measures in the FY27 budget — including a cut in the super tax from 10% to 8% for large companies and revised tax slabs for salaried individuals — as steps the market received positively, projecting they could lift corporate earnings by 3–3.4%. But even Ghani cautioned that ambitious revenue targets and ongoing fiscal pressures could complicate implementation.
The Bottom Line
Taken together, the data and expert commentary point to a fiscal turnaround that is real in its headline numbers but built substantially on one-off revenue sources, a regressive tax structure, and remittance inflows rather than export growth or productivity gains. Growth projections for FY27 are already being revised amid inflation, a rate hike, falling FDI, and renewed current account pressure. As one Business Recorder analysis put it, Pakistan now stands at “a perilous fiscal crossroads” — stabilized, but not yet transformed.
