On paper, Pakistan has just pulled off a fiscal feat. Provisional data released by the finance ministry show the consolidated budget deficit shrank to 2.6% of GDP in 2025-26, the lowest since 2003-04 and far below the 5.1% target. Yet the windfall owes little to tax collection and much to a mysterious Rs1.26trn shortfall in debt-servicing costs against the budget, alongside deep cuts to development spending. With the deficit set to widen again this year and interest costs projected to jump by about 16%, sceptics wonder whether the achievement is a turning point or a one-off.
The scale of the improvement is striking. The deficit fell from 5.4% of GDP in 2024-25, a reduction of Rs2.855trn in absolute terms. Higher net federal revenues, after transfers to the provinces under the National Finance Commission award, contributed Rs573bn, or about a fifth. The bulk, some 61%, came from a Rs1.754trn drop in federal expenditure.
Interest payments did most of the work. Debt servicing was budgeted at Rs8.207trn but came in at Rs6.947trn, and fell by Rs1.217trn compared with the previous year. One analyst points out that this happened even though the central bank's policy rate rose by a percentage point over the year, and argues that the finance ministry owes an explanation for how the saving was achieved.
Other contributors look equally fragile. Development spending was cut by Rs281bn compared with 2024-25, a reduction of almost 20%. A negative statistical discrepancy of Rs853bn, against Rs328bn a year earlier, also flattered the result. The provinces' combined cash surplus rose by Rs528bn, but chiefly because they too trimmed development budgets, not because of the jump in agricultural income tax, property levies and sales tax on services envisaged under the IMF programme.
The squeeze on investment has drawn criticism. Critics argue that, with the budget in such healthy shape, there was a compelling case for larger project allocations, particularly in water resources, as a counter to possible Indian actions following its withdrawal from the Indus Waters Treaty. Revenue collected by the Federal Board of Revenue, meanwhile, grew by a modest 10%.
The outlook for 2026-27 suggests a reversal. The deficit target has been set at 3.6% of GDP, a full percentage point higher. Debt servicing is projected to rise by Rs1.107trn, an increase that analysts say cannot be explained by a modest rise in interest rates. Current spending on running the civil government, defence, subsidies and grants was contained only temporarily, they argue, rather than through lasting savings.
Current expenditure remains the root of the problem. Estimated at 16.2% of GDP in 2025-26, it is the main reason successive governments have borrowed ever more at home and abroad. Interest accounted for 5.5% of GDP and defence for 2.0%, items widely seen as beyond any government's discretion: default on debt would be catastrophic, while a spike in terrorist violence has obliged the state to fund its security forces in full.
Borrowing is also expensive by regional standards. The policy rate stands at 11.5%, above Sri Lanka's 8.75%, despite that country's sovereign default four years ago, and Bangladesh's 9.5%. Government bonds yield 11.96% and three-month paper around 11.42%, against 5.25% in India and a seven-day rate of 1.4% in China. Even America, financing a deficit of roughly $2trn, borrowed at 3.8% for three months and 4.6% for ten years in early August.
Officials justify borrowing by citing a debt-to-GDP ratio of 70-74%, depending on how nominal GDP is calculated, which compares favourably with America's 124%, Greece's 149% and Britain's 103%. One editorial puts the figure at 68.3%, down from 73.9% in 2021-22. But those Western economies enjoy investment-grade ratings and easy access to credit, and regional peers such as China and India hold large foreign-exchange reserves.
There has been genuine progress. After three consecutive primary surpluses, of 0.9%, 2.4% and 2.9% of GDP, debt servicing consumed 66% of net federal revenues in 2025-26, roughly half its 122% peak in 2022-23. Public debt fell by 3.4% of GDP last year. Still, overall public debt and liabilities reached Rs98trn, or 77% of GDP, and gross public debt of Rs86.7trn has risen by 76% over five years.
The price of stability has been steep. Since 2022, the government of Shehbaz Sharif has piled taxes on an already narrow base while monetary policy stayed tight and inflation soared. Poverty has risen over five years; investment has dwindled and confidence has eroded. Pakistan is also an outlier in the ratio of interest payments to revenue, while most countries with higher debt ratios have recorded faster growth in income per person.
History counsels caution. Pakistan ran primary surpluses for six years from 1998-99 to 2003-04 and restructured its debt in the early 2000s, only for wasteful use of borrowed money to return it to the brink in 2022-23. An IMF report published in April, warning that global public debt is set to hit 100% of GDP by 2029, named Pakistan among countries that must broaden their tax base and rationalise tax exemptions.
The lesson, critics argue, is that fiscal surpluses and tight money cannot by themselves lay a foundation for growth. Without cuts to current spending, a wider tax net, power-sector reform and better governance, the headline numbers, largely shaped by the IMF programme, risk offering only another brief reprieve.