ISLAMABAD: Fitch Ratings has warned that deeper-than-expected spending cuts could weaken Pakistan’s medium-term economic growth. The agency said continued reductions in development spending may limit future economic expansion despite improving fiscal indicators.
In its review of the federal budget for FY2026-27, Fitch said the government remains committed to fiscal discipline under the International Monetary Fund programme. It noted that Pakistan has targeted a primary surplus of 2 percent of GDP and an overall fiscal deficit of 3.6 percent of GDP for the new fiscal year.
Moreover, Fitch highlighted that FY2025-26 delivered a stronger-than-expected fiscal performance. The agency attributed this result to aggressive expenditure cuts and a provincial surplus of 1.1 percent of GDP, which exceeded previous estimates.
However, Fitch stressed that fiscal consolidation has relied heavily on spending compression. It said capital expenditure has faced the largest reductions because of ongoing revenue challenges. Consequently, the agency warned that persistently low development spending could weaken economic growth, reduce future tax revenues, and complicate debt management.
Furthermore, Fitch described the FY2026-27 tax revenue target as highly ambitious. It said achieving the goal will require sustained improvements in tax collection despite structural weaknesses in tax administration and limited new tax measures.
The agency also noted that federal tax collections in FY2025-26 remained below official targets. Meanwhile, non-tax revenues, including transfers from the State Bank of Pakistan, are expected to decline during FY2026-27.
In addition, Fitch identified reliance on a large provincial surplus as another fiscal risk because coordination challenges continue between federal and provincial governments.
The ratings agency also warned that high interest costs remain a major concern. Rising inflation, increasing policy rates, and Pakistan’s large short-term domestic debt could raise debt servicing expenses further.
Therefore, Fitch maintained that Pakistan’s fiscal flexibility remains limited while affirming its ‘B-‘ sovereign rating with a stable outlook.
