ISLAMABAD – Pakistan’s strategy of narrowing its budget deficit through deep spending reductions could undermine long-term economic growth, Fitch Ratings has cautioned, warning against excessive reliance on cuts in development expenditure to meet fiscal targets.
In its assessment of Pakistan’s federal budget for FY2026-27, the global credit rating agency pointed out that the country remains committed to fiscal consolidation under the International Monetary Fund (IMF) programme, with targets including a primary surplus of 2 percent of GDP and an overall fiscal deficit of 3.6 percent.
However, Fitch observed that recent progress in reducing the fiscal gap has largely come from curtailing government spending, particularly development and capital outlays. While effective in the short term, the agency said such an approach may not be sustainable over time.
The report cautioned that continued low investment in capital projects could weaken medium-term growth prospects, restrict revenue generation capacity, and complicate debt sustainability. It also noted that fiscal space for further expenditure cuts is shrinking as spending pressures continue to build.
Fitch further described Pakistan’s tax revenue target for FY2026-27 as difficult to achieve, pointing to persistent structural weaknesses in tax administration and limited scope for introducing significant new revenue measures. It added that tax collection in FY2025-26 is also expected to fall short of official projections despite some improvement in performance.
The agency also flagged risks linked to reliance on provincial cash surpluses, noting that such inflows have historically been inconsistent and dependent on coordination between federal and provincial governments.
On debt servicing, Fitch said Pakistan continues to face a heavy repayment burden due to a large stock of short-term domestic debt and high borrowing costs. It projected that interest payments would consume 39.1 percent of government revenues in FY2026-27, significantly higher than the median of 12.1 percent for countries with a similar ‘B’ credit rating.
Pakistan currently holds a ‘B-’ rating with a stable outlook from Fitch Ratings.
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