ISLAMABAD: Projecting Pakistan’s fiscal deficit at around 3.2 per cent of the gross domestic product (GDP) and a slightly declining primary surplus from 2.5pc, the International Monetary Fund (IMF) has advised phasing out fiscally draining fuel subsidies, addressing contingent liabilities and broadening the tax base for credible medium-term sustainability.
In its twice-a-year Fiscal Monitor 2026, the IMF projected Pakistan’s revenue to have already peaked with a downward but stable outlook in the medium-term ending 2031. This would thus lower public debt, yet was significantly higher than required under the Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005, the IMF indicated as it anticipated government expenditures to remain stubborn.
The Fund projected Pakistan’s fiscal deficit at 3.2pc of GDP during the current fiscal year and next year — down from 5.4pc in FY2025 — and then declining to 3pc and 2.8pc for FY2028 and FY2029, respectively. It forecast the fiscal deficit rising again to 3.6pc in FY2030 and even higher at 4.6pc of GDP in FY2031.
The fiscal monitor expected Pakistan’s primary balance — the gap between total revenues and expenditures minus interest payments — to peak at 2.5pc during the current year against 2.4pc of GDP last year. The primary fiscal surplus would be declining to 2pc next year and stay stable for the following two fiscal years, before falling drastically to 1pc of GDP in FY2030 and almost negligible 0.1pc in FY2031.
The Fund estimated that the government revenue would remain unchanged at 15.8pc of GDP this year and fall to 15.3pc next year. It anticipated that general government revenues would stay stable at 15.5pc of GDP throughout the subsequent four fiscal years.
Chiefly due to lower debt servicing cost following a fall in interest rates from a record 22pc to less than half, the IMF projected Pakistan’s general government expenditure falling more than two percentage points to 19pc during the current fiscal year and further rationalising to 18.5pc over the following two fiscal years. It also projected the expenditure rising to 20pc of GDP by 2031.
The fiscal monitor also put the country’s gross government debt at 70.1pc of GDP for the current fiscal year, down from 72.8pc last year. Going forward, it projected gross government debt to steadily decline from 67.1pc in FY2027 to 64pc in FY2028, 60.8pc in FY2029, 59pc in FY2030 and 58.2pc by FY2031.
Likewise, net government debt was estimated at 64.4pc during the current year, down from 66.5pc last year. The IMF said net government debt would also maintain its declining trend over the subsequent four years from 62.1pc in FY2027 to 55pc by FY2031.
Talking about the global financial stability, the IMF warned that risks were elevated as the global financial system was confronting the ongoing war in the Middle East, potential inflationary pressures, rising risks of further tightening in financial conditions, and several channels through which market turmoil could escalate into financial instability.
Markets have corrected in an orderly manner so far, but risks are asymmetric, it said, noting that “the longer the conflict continues, the greater the risk that global financial conditions — which had been very accommodative before the war — could tighten further and more abruptly”.
Since February, global equity prices have declined by 8pc, after being boosted by strong corporate profits in the months before. The war in the Middle East threatens to reinforce adverse financial and commodity price dynamics — through higher global interest rates, dollar appreciation, and energy price surges — exacerbating macroeconomic pressures in emerging market and developing economies.
The IMF also said the fiscal outlook had deteriorated further since the April 2025 Fiscal Monitor.
“Global debt-at-risk three years ahead now stands near 117pc of GDP, with a gap of roughly 20 percentage points between the median projection and the right tail, underscoring heightened downside risks. Several reinforcing forces could weigh on the fiscal outlook,” it said.
The conflict in the Middle East could further strain government finances through higher food and fuel prices, tighter financial conditions, lower activity, and rising defense outlays. In a scenario of prolonged conflict, global debt-at-risk could increase by an additional 4 percentage points. Separately, a correction in artificial intelligence-related asset valuations, in which US stocks fall by 20pc with spillovers to global financial conditions, could raise global debt-at-risk by a further 2.4 percentage points, the Fund said.
Protectionist pressures and geoeconomic fragmentation continued to push governments toward industrial subsidies and trade-related support that have uncertain payoffs in terms of productivity, raising the risk that primary balances will fall short of debt-stabilising levels if growth underperforms. Domestic instability further heightens fiscal pressures, it added.
Within countries, social unrest has increased across income groups, and surges in such unrest are associated with lower growth and wider primary deficits. At the same time, pressures on the independence of central banks, whether overt or implicit, can lift inflation expectations and risk premiums even for highly rated economies, eroding the credibility that keeps borrowing costs contained, it warned.
The IMF said the window for orderly fiscal adjustment was narrowing, with advanced economies with large debt loads needing concrete, well-sequenced consolidation measures, not aspirational medium-term targets. “For the United States, the arithmetic is inescapable: Stabilising the country’s debt path will require action on both revenue and expenditure, including spending on the major entitlement programmes,” it said.
Overall, the Fund advised that given already depleted fiscal buffers, policy responses to higher energy costs should be tightly calibrated, targeted to vulnerable households and viable firms, and consistent with monetary policy efforts to contain inflation.
“Broad-based price subsidies should be avoided where they carry large fiscal costs, are difficult to unwind, or suppress domestic price signals in ways that spill over to global commodity markets,” the IMF advised, adding that “domestic fuel and gas prices should continue to reflect international price movements and support demand adjustment, even when temporary targeted support is in place”.
Across all country groups, fiscal policy must become more forward-looking and structurally anchored as countries manage the effects of the energy price shock. Safeguarding the independence of central banks and the integrity of fiscal frameworks is essential for both advanced and emerging market economies. Clear communication of fiscal realities and enhanced transparency can help anchor expectations and build support for needed adjustment, it said.
