Pakistan’s fiscal strains deepen as revenues miss targets, debt costs climb

ISLAMABAD: Pakistan’s fiscal position is coming under increased pressure as government spending continues to rise, revenue collection remains below target in key areas, and debt-related costs tighten the space for development expenditure.

The cost of running the civil government has climbed sharply, rising from Rs89.5 billion in the first quarter of FY2022 to more than Rs161 billion in the first quarter of FY2026, an increase of nearly 80%. During the first half of FY26, this expenditure rose 12.3% to Rs380.6 billion, while in the first nine months of FY26 it crossed Rs629 billion, up 12.57% from a year earlier despite austerity measures. Employee-related expenses reached Rs427 billion, recording an increase of nearly 10% due to salary and pay adjustments.

The federal government has also not been able to realise hundreds of billions of rupees in non-tax revenues. These include more than Rs400 billion due from provinces. Outstanding amounts include Rs417 billion under the Gas Infrastructure Development Cess, Rs171 billion from the fertiliser sector, and Rs283 billion in provincial interest payments. Despite these gaps, the government is considering a non-tax revenue target of Rs5 trillion for FY27 to help contain the fiscal deficit.

Revenue gaps and borrowing pressure

Over the period from FY15 to FY25, the Federal Board of Revenue posted record tax collection, but public debt increased at a faster pace. The problem is not limited to revenue generation, as borrowing and tax receipts are increasingly being used to finance recurring expenditure instead of productive investment.

Pakistan remains caught between IMF-linked fiscal targets and short-term policy steps, while the state’s role in economic activity continues to expand. Pakistan is among the largest economies supported by the IMF and the federal cabinet consists of 54 ministers and advisers, with or without divisions.

For May, the FBR collected Rs994 billion, taking total collection in the first 11 months of FY26 to Rs11.257 trillion. This came despite disruption linked to the Iran conflict and concerns surrounding the Strait of Hormuz. However, customs duty collection fell short of target by Rs116 billion, reaching Rs1.18 trillion and posting only 2% growth despite a larger import bill. Sales tax collection stood at Rs3.78 trillion, missing target by Rs457 billion, though it was still 7.8% higher than the same period last year.

External shocks add to domestic weakness

Geopolitical tensions in the Middle East are adding to Pakistan’s economic vulnerability. Since February 2026, oil prices have risen by more than 40% and LNG prices by 54%. For Pakistan, which relies heavily on imports for energy, this is contributing to inflation nearing 12%, a higher import bill and increased fiscal stress.

The effect is already showing up in weaker sales tax collection and added pressure on revenue goals. At the same time, remittance risks are increasing, especially from the UAE, as regional instability could affect job opportunities for Pakistani workers there. The State Bank of Pakistan’s foreign exchange reserves stood at $17.147 billion on May 22.

The State Bank has continued to rely on interest rate increases rather than exchange rate adjustment to curb imports. After the last monetary policy decision, the policy rate was raised by 100 basis points to 11.5%, taking borrowing costs above 12.5%. Markets are expecting another increase of 100 basis points at the next Monetary Policy Committee meeting.

Structural issues in the fiscal system

Several structural weaknesses exist in Pakistan’s fiscal framework. Only 5.2 million people are tax filers in a country of 250 million, and nearly 39% of filers submitted nil returns last year. The large size of the informal economy means retail, real estate, agriculture and services remain mostly outside the tax net.

Weak enforcement, leakages, corruption and policy inconsistency undermine revenue collection. The tax system relies too heavily on indirect taxes, placing a greater burden on lower- and middle-income households, while fixed expenditures such as debt servicing, subsidies and non-development spending continue to squeeze out space for investment and growth.

Higher economic growth alone is unlikely to resolve these imbalances, as in Pakistan growth often raises imports, widens the current account deficit and leads to another stabilisation cycle. High energy costs and elevated interest rates have weakened industrial competitiveness, with exports under pressure and domestic industry facing difficulties. The country appears to be heading towards another IMF programme after the completion of the current $7 billion Extended Fund Facility.