KARACHI: 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, according to an analysis released August 13.
The fiscal deficit was also lower than the previously projected 3% of GDP for FY26, reflecting improved fiscal management and a significant reduction in government interest expenses.
Total government expenditure declined 4% year-on-year during FY26, largely because interest expenses fell 22% amid lower interest rates and improved debt management by the Finance Ministry’s debt division.
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.
Pakistan recorded a primary surplus of Rs3.6 trillion, equivalent to 2.9% of GDP, in FY26, compared with Rs2.7 trillion, or 2.4% of GDP, a year earlier.
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.
Interest expenses during the fourth quarter amounted to Rs2 trillion, down 18% year-on-year despite an increase in domestic debt. On a quarterly basis, however, interest expenses rose 44%, reflecting seasonal debt maturities that largely fall in December and June.
Spending on subsidies and grants declined 29% year-on-year to Rs1 trillion during FY26, contributing to the improvement in the overall fiscal position.
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.
For FY27, the analysis projects a fiscal deficit of 3.6% of GDP and a primary surplus of 2% of GDP.
