Fitch Warns Pakistan: Spending Cuts May Hinder Medium-Term Growth

Fitch Ratings warned on Tuesday that stronger-than-anticipated spending cuts, especially the continued compression in capital expenditure, could adversely affect Pakistan's medium-term growth prospects. The warning was issued in Fitch's review of the federal budget for 2026-27.

Fitch observed that Pakistan is maintaining a clear commitment to fiscal discipline within its International Monetary Fund (IMF) program. This commitment includes targeting a primary surplus of 2% of GDP and an overall deficit of 3.6% of GDP for FY27. This follows a strong performance in FY26, which saw a projected primary surplus of 2.5% of GDP, driven by significant spending cuts and a provincial surplus of 1.1% of GDP, surpassing Fitch's expectations.

Despite supporting short-term deficit reduction, Fitch noted that fiscal consolidation has largely depended on expenditure compression, particularly capital spending cuts. The agency suggested this approach might be difficult to sustain as a medium-term strategy, stating that "persistently low capex may weigh on medium-term economic growth, limit future revenue mobilisation, and complicate debt dynamics."

Fitch praised Pakistan's fiscal discipline but expressed caution regarding the FY27 tax revenue target. The agency's fiscal projections remain more conservative than the government's, highlighting risks to key targets. Achieving the FY27 primary surplus will depend on sustained revenue over-performance relative to historical trends, which is challenging due to structural weaknesses in tax administration and a limited pipeline of new tax measures.

Federal tax collections in FY26 are officially projected to be 0.7 percentage points of GDP below target, indicating persistent challenges in meeting ambitious revenue goals. The FY27 tax revenue target of 10.6% of GDP would be a record, building on improved collection in FY26. Non-tax revenues, including profit transfers from the State Bank of Pakistan, are expected to decline in FY27. Reliance on a substantial provincial surplus also introduces uncertainty, given historical variability and coordination challenges between federal and provincial governments.

Interest costs remain structurally elevated due to Pakistan's large stock of short-maturity domestic debt and high market yields. The projected FY27 budget's interest-to-revenue ratio stands at 39.1%, significantly higher than the median of 12.1% for 'B-rated peers. This constrains fiscal flexibility and crowds out priority spending, contributing to a weakness in Pakistan’s 'B-' rating, which has a stable outlook. Pakistan’s overall fiscal deficit of 3.6% of GDP in FY27 is also larger than the 'B' rating median of 3%.

According to Dawn Pakistan, these observations were published on June 17th, 2026.