ISLAMABAD: Fitch Ratings on Tuesday warned that spending cuts stronger than anticipated, particularly the continued compression in capital expenditure, could weigh on medium-term growth prospects.

In its review of the federal budget 2026-27, Fitch said Pakistan was maintaining a clear commitment to fiscal discipline under the International Monetary Fund programme by targeting a primary surplus of 2pc of GDP and an overall deficit of 3.6pc of GDP. This follows a strong FY26 performance, with a projected primary surplus of 2.5pc of GDP, driven by aggressive spending cuts and a provincial surplus of 1.1pc of GDP, exceeding its expectations.

Amid revenue challenges, fiscal consolidation has relied heavily on expenditure compression, particularly cuts to capital spending, as in FY26, Fitch noted.

While this has supported short-term deficit reduction, it will be difficult to sustain as a medium-term strategy. “Persistently low capex may weigh on medium-term economic growth, limit future revenue mobilisation, and complicate debt dynamics”, it said, adding that the scope for further reductions was narrowing, heightening the trade-off between fiscal adjustment and growth as spending pressures rise from a suppressed base.

Praises fiscal discipline, but sees FY27 tax revenue target challenging

On the other hand, it says that the policy momentum of fiscal consolidation improves near-term fiscal prospects, but Pakistan remains relatively vulnerable to inflation and under-performance on tax collection. Therefore, Fitch’s fiscal projections remain more cautious than the government’s, highlighting risks around the key targets.

It noted that achieving the FY27 primary surplus will depend on sustained revenue over-performance relative to historical trends, which are challenging given structural weaknesses in tax administration and a limited pipeline of new tax measures.

Federal tax collections in FY26 are officially projected to be 0.7 percentage points of GDP below target, underscoring persistent challenges in meeting ambitious revenue goals. The FY27 tax revenue target (10.6pc of GDP) would be a record, building on improved collection in FY26. Non-tax revenues, including profit transfers from the State Bank of Pakistan, are, meanwhile, set to decline in FY27.

The reliance on a large provincial surplus is another source of uncertainty, given historical variability and coordination challenges between federal and provincial governments, Fitch observed.

Interest costs remain structurally elevated due to Pakistan’s large stock of short-maturity domestic debt and high market yields. A rising policy rate as inflation rises due to higher world energy costs compounds the risk of overspending on interest payments.

The FY27 budget’s interest/revenue ratio, projected at 39.1pc is substantially above the median 12.1pc of ‘B-rated peers. This limits fiscal flexibility and crowds out priority spending, forming a weakness in Pakistan’s rating of ‘B-’ with a stable outlook.

Pakistan’s overall fiscal deficit at 3.6pc of GDP in FY27 also remains larger than the ‘B’ rating median of 3pc.

Published in Dawn, June 17th, 2026