ISLAMABAD: The Asian Development Bank of Pakistan warned the federal government of shrinking fiscal space in 2026-27 amid multiple issues.
ADB said the fiscal strategy for FY2027 needs support of economic activity while maintaining fiscal discipline under the International Monetary Fund (IMF) program.
However, ambitious revenue targets and rising defense and interest costs could further restrict spending that supports economic growth, the Asian Development Bank (ADB) said.
In its July 2026 Asian Development Outlook, the ADB said Pakistan targets a consolidated fiscal deficit of 3.6% of GDP.
The government also aims for an underlying primary surplus of 2.0% of GDP, matching targets agreed under the IMF’s Extended Fund Facility.
The fiscal strategy focuses on stronger revenue collection and selective spending controls. Meanwhile, the government has introduced measures aimed at supporting businesses and households.
These include revised income-tax slabs, a lower super tax, reduced property transaction taxes and lower tariffs on industrial inputs.
FBR revenue target remains challenging
The ADB said Federal Board of Revenue collections are projected to rise 17.6% in FY2027.
As a result, FBR tax revenue is expected to reach 10.6% of GDP from 10.2% in FY2026.
The target relies partly on administrative reforms, including automated audits through a National Faceless Center and wider retail-sector coverage.
However, the bank described the revenue target as ambitious after shortfalls in FY2025 and FY2026.
Defense and interest costs rise
The ADB expects defense spending to increase 16% in FY2027, while interest payments could face pressure from higher debt and policy rates.
Lower power subsidies and reduced provincial development programs may provide some relief.
However, the bank warned that missing revenue targets could force further spending cuts during the year.
Fiscal deficit falls in FY2026
Pakistan’s fiscal deficit fell to 2.6% of GDP in FY2026 from 5.4% in FY2025.
Meanwhile, the primary surplus reached 2.9% of GDP, exceeding the IMF projection of 2.6%.
The improvement largely reflected lower interest costs rather than significant progress in expanding the tax base.
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