S&P Projects Pakistan’s Budget Deficit at 5.1%, GDP Growth Below Target
Pakistan’s FY2026 Budget Struggles with Deficit, Defence Costs. Pakistan’s fiscal year 2026 budget aims to balance fiscal consolidation efforts with a significant rise in defence spending, according to a recent analysis by S&P Global Market Intelligence. However, the report highlights potential shortfalls in revenue generation and real GDP growth targets, signaling economic challenges ahead.
S&P forecasts the overall budget deficit at 5.1% of GDP, notably higher than the government’s target of 3.9%. Real GDP growth is projected at 3.6%, falling short of the official goal of 4.2%. Despite these challenges, targeted relief measures are expected to provide some protection to lower- and middle-income households amid easing inflation, which is forecasted to slow to 3.9% in 2025 and 6.3% in 2026.
Key points from the outlook include:
- The budget reflects a continued commitment to fiscal consolidation aligned with Pakistan’s IMF program, which supports access to concessional financing and debt rollovers from friendly nations and multilateral institutions. Success depends on the government’s effective implementation of revenue-raising measures.
- Revenue targets are ambitious and historically underachieved. Shortfalls in revenue collection could lead to reduced development spending, with priority likely shifting to current expenditures, particularly defence and interest payments.
- Defence spending has increased significantly, driven by recent military tensions. This rise is expected to limit funding available for critical sectors like education and health. The additional defence budget is primarily earmarked for procurement of military equipment, including fighter jets and ballistic missile defence systems.
- The reliance on indirect taxation, particularly on wholesale and retail sectors with large informal economies, may keep inflationary pressures high as businesses pass costs to consumers. This could hamper revenue growth and widen the fiscal deficit further.
The analysis underscores the complex balancing act Pakistan faces in managing fiscal discipline while addressing security priorities and economic growth, with implementation risks that could impact the country’s financial stability in the coming year.
