Pakistan’s fiscal deficit fell to 2.6% of GDP in fiscal year 2025-26 (FY26), marking the lowest level since FY2003, as record provincial cash surpluses, higher petroleum levy collections and a sharp decline in interest payments helped improve the government’s fiscal position.
According to the Ministry of Finance’s annual report on fiscal operations for FY26, the primary surplus also reached a historic 2.9% of GDP. The improvement came despite a 16% increase in the cost of running the civil government, which crossed the Rs1 trillion mark for the first time.
The government’s petroleum levy collection emerged as one of the major sources of additional revenue during the year, reaching a record Rs1.567 trillion, up 29% from Rs1.22 trillion in FY25.
The collection exceeded the original budget target of Rs1.468 trillion and was also higher than the revised target of Rs1.498 trillion.
Petroleum Levy Collection Reaches Record Rs1.567tr
The sharp increase in petroleum levy revenue came amid record consumer-end fuel prices following heightened geopolitical tensions and disruptions in international oil markets.
The Rs1.567 trillion petroleum levy collection did not include an undisclosed amount collected through customs duty. The government also collected Rs26 billion through the carbon levy.
For FY27, the government has set an even higher petroleum levy collection target of Rs1.676 trillion, along with a target of Rs50 billion from the climate levy on petroleum products.
The increased dependence on petroleum-related revenue highlights the importance of fuel taxation in Pakistan’s fiscal framework. However, higher levies can also increase the cost of petroleum products for consumers, particularly when international oil prices are already elevated.
Interest Payments Fall Sharply
One of the biggest factors behind the improvement in the fiscal position was a substantial decline in interest payments.
According to the Finance Ministry, interest payments fell to Rs6.947 trillion, equivalent to 5.5% of GDP, in FY26 from Rs8.887 trillion, or 7.7% of GDP, in FY25.
This represented a reduction of Rs1.939 trillion in a single year.
The decline was largely linked to the easing of the policy rate from 22% to 10%, which reduced the government’s debt-servicing burden.
As a result, total government expenditure declined to Rs23.09 trillion in FY26 from Rs24.16 trillion in the previous fiscal year.
Total expenditure also fell to 18.2% of GDP from 21.1%, while current expenditure declined to 16.3% of GDP, or Rs20.69 trillion, from 18.8%, or Rs21.5 trillion, in FY25.
Provincial Surpluses Support Fiscal Position
Record cash surpluses generated by the provinces also played a major role in containing the fiscal deficit.
The four provinces collectively transferred a cash surplus of Rs1.45 trillion to the Centre in FY26, up 57% from Rs921 billion in FY25. The increase amounted to Rs529 billion in one year.
The provincial surplus was also higher than the Rs1.38 trillion commitment under the national fiscal pact.
Punjab contributed the largest amount, posting a surplus of Rs915 billion. This was 163% higher than its Rs348 billion contribution in FY25.
Sindh’s surplus increased 24% to Rs350 billion from Rs283 billion.
Khyber Pakhtunkhwa recorded a surplus of Rs165 billion, down from Rs176 billion a year earlier, while Balochistan posted a surplus of Rs20.74 billion.
The large provincial cash balances provided significant support to the federal government’s overall fiscal consolidation efforts.
Civil Government Expenses Cross Rs1tr
Despite austerity and restructuring measures, expenditure on running the civil government increased substantially.
Civil government expenditure rose 16% to Rs1.033 trillion in FY26 from Rs892 billion in FY25. It also exceeded the budget estimate of Rs971 billion.
Defence expenditure increased by 18% to Rs2.588 trillion from Rs2.194 trillion. However, the spending was only Rs38 billion above the Rs2.55 trillion budget allocation.
Meanwhile, subsidies were contained at Rs1.01 trillion, nearly 22% lower than the Rs1.3 trillion recorded in FY25.
Development expenditure also declined to Rs727 billion from Rs786 billion.
FBR Revenue Falls Short Of Target
The government’s total revenue collection declined marginally as a share of the economy, falling to 15.6% of GDP in FY26 from 15.7% a year earlier.
Federal Board of Revenue (FBR) collection reached Rs13.01 trillion, showing an increase of nearly 11% from Rs11.74 trillion in FY25.
However, the collection remained around 10% below the government’s target.
Despite the shortfall, higher petroleum levy receipts and provincial surpluses, combined with lower debt-servicing costs, helped the government achieve a significant improvement in its fiscal position.
Primary Surplus Reaches Historic 2.9%
Pakistan’s primary surplus, which measures government revenue against expenditure excluding interest payments, reached 2.9% of GDP in FY26.
This was the highest level since the government began reporting the indicator in FY20.
The primary account remained in deficit until FY24, when it moved into a surplus of 0.9% of GDP. It then improved to 2.4% in FY25 before reaching 2.9% in FY26.
The overall fiscal deficit has also declined significantly from its peak of 8.9% of GDP in FY19. It stood at 8.1% and 7.1% in the following two years, before rising again to 7.9% in FY22.
The deficit has subsequently declined amid fiscal consolidation measures implemented under successive IMF-supported programmes.
Statistical Discrepancy Reaches Rs853bn
Despite the improvement in headline fiscal indicators, the Finance Ministry reported a record Rs853 billion statistical discrepancy in FY26.
The discrepancy was substantially higher than the Rs329 billion recorded in FY25 and had previously raised concerns from the IMF.
The ministry attributed Rs448 billion of the discrepancy to the federal level and Rs405 billion to the provinces.
According to the ministry, the federal discrepancy resulted from differences caused by reporting time lags and book adjustments involving the State Bank of Pakistan, FBR and Economic Affairs Division data.
At the provincial level, Rs266 billion was attributed to increases in commercial bank deposits. Khyber Pakhtunkhwa and Balochistan accounted for Rs95 billion and Rs72 billion, respectively, largely due to movements in bank deposits.