Fitch Ratings flagged a dangerous trade-off in Pakistan’s FY27 budget on Tuesday. The government is cutting spending hard enough to hit its fiscal targets. But sustained compression of capital expenditure—the kind needed to meet a 3.6% deficit target—will eventually choke growth, the ratings agency argues.
The numbers look decent on paper. Pakistan posted a 2.5% primary surplus of GDP in FY26, beating expectations. Spending restraint drove this. A 1.1% provincial surplus added cushion. For FY27, the government targets 2% primary surplus and 3.6% overall deficit—both consistent with IMF programme commitments.
Here’s the problem: this fiscal consolidation is running almost entirely on capex cuts. When you starve infrastructure investment year after year, you don’t get cleaner books—you get weaker infrastructure, slower revenue collection, and a nastier debt spiral later. Fitch sees the math. The margin for further cuts is closing fast.
Revenue targets keep missing, but FY27 expects a record
Tax collection numbers expose structural weakness. FY26 federal tax revenues fell 0.7 percentage points short of target. That’s not a rounding error. Yet the FY27 budget builds on improved collections and targets 10.6% of GDP in tax revenue—a historic high.
Fitch doesn’t buy it. The ratings agency has seen Pakistan miss ambitious revenue targets before. Tax administration remains structurally weak. The pipeline of new tax measures is thin. Non-tax revenues, including State Bank profit transfers, are actually expected to decline in FY27. So the entire plan hinges on beating historical trends in a system known for underperformance.
Provincial surpluses add another layer of uncertainty. Fitch notes the historical volatility and coordination problems between federal and provincial governments. Rely too heavily on provincial revenue, and you’re gambling with coordination failures.
Interest costs crowd out everything else
The deeper wound isn’t deficit size—it’s debt servicing. Interest costs will consume 39.1% of tax revenue in FY27, compared to a 12.1% median for countries rated ‘B’. This isn’t just a number. It’s a drain on spending for health, education, or roads.
Pakistan’s domestic debt has short maturities and high yields. As the policy rate rises—a likely scenario if global energy prices stay elevated—interest costs will climb further. The central bank can’t cut rates without inviting inflation. The government can’t ignore rate hikes without losing bond market access. That squeeze leaves little room to rebuild capex or adjust spending.
Fitch maintains a stable outlook on Pakistan’s ‘B-‘ rating, but the agency’s fiscal projections are more cautious than the government’s. Vulnerability to inflation shock, tax revenue underperformance, or interest rate spike remains high. The 3.6% deficit sits above the 3% median for ‘B’-rated peers. None of this is moving the needle toward an upgrade.
