Pakistan's Finance Ministry Warns of Multiple Risks to FY2026-27 Budget

Pakistan's Finance Ministry has issued a warning regarding key risks that could significantly impact the nation's budget outlook for the fiscal year 2026-27. The identified challenges include global oil price increases, slower-than-expected GDP growth, revenue shortfalls, rising debt servicing costs, the performance of state-owned entities, and the potential for unforeseen natural disasters and climate change impacts.

Finance Minister Muhammad Aurangzeb and Finance Secretary Imdad Ullah Bosal presented a written statement of fiscal risks to parliament, as required by the Public Finance Management Act 2019. The statement categorizes these risks into seven major areas: macroeconomic, revenue, debt, state-owned entities, climate change, natural disasters, and commodity financing. Mitigation measures were also proposed to support fiscal discipline and enhance public finance resilience.

A potential rise in global oil prices, particularly a $40 per barrel increase, is projected to add 0.8% of GDP to the fiscal deficit in FY2026-27. This could be exacerbated by decisions to waive full price pass-through to domestic consumers, leading to reduced petroleum levy receipts and increased energy subsidies. Over 1.035 trillion rupees in special grants secured from provinces have been allocated to address the broader impacts of ongoing conflicts.

Macroeconomic risks, such as a 1% point decline in real GDP growth, are estimated to widen the fiscal deficit by about 0.2% of GDP due to lower tax collections and increased social safety net expenditures. Inflationary pressures and exchange rate depreciation could further strain public finances under such a scenario.

Revenue collection faces vulnerabilities from lower tax elasticity, economic slowdowns, and structural challenges. A 10% shortfall in tax revenue growth could reduce GDP by 0.7%, while a 30% decline in State Bank of Pakistan surplus profits might increase the deficit by 0.3% of GDP. Additionally, tax exemptions and concessions present a structural risk, potentially widening the fiscal deficit by 1.3% of GDP.

Debt servicing costs are another critical area of vulnerability. A 200-basis-point rise in domestic interest rates and a 100-basis-point rise in external rates could increase interest payments, widening the deficit by 0.4% of GDP. Higher refinancing risks and greater reliance on short-term instruments could increase the deficit by up to 0.8% of GDP.

State-owned entities pose risks through lower dividend payments and increased government support. A 6% shortfall in dividends is estimated to widen the deficit by 0.02% of GDP, while financial support reaching 1.5% of GDP could increase the deficit by 0.4% of GDP.

Climate change mitigation pathways could raise spending on green infrastructure and adaptation, increasing the deficit by 0.2% of GDP. Natural disasters represent one of the largest risks, with an average event potentially increasing the fiscal deficit by up to 1.5% of GDP without dedicated financing mechanisms. Guarantees for commodity financing operations, with a 25% probability of actualization, could increase the deficit by 0.1% of GDP.

According to Dawn Pakistan, these warnings highlight the multifaceted challenges facing Pakistan's fiscal stability in the coming year.