Pakistan is facing a critical juncture in its fiscal management as the International Monetary Fund (IMF) warns that the window for orderly adjustment is narrowing. In its latest Fiscal Monitor 2026, the Fund has urged the government to phase out fuel subsidies, broaden the tax base, and address contingent liabilities to ensure medium-term sustainability.
The IMF projects Pakistan’s fiscal deficit to hover around 3.2 per cent of gross domestic product (GDP) for the current and upcoming fiscal years. While this marks a significant improvement from the 5.4 per cent recorded in FY2025, the Fund cautions that government expenditures remain “stubborn,” threatening the country’s ability to maintain a credible debt path.
For a country long grappling with chronic deficits and a narrow revenue stream, the IMF’s advice centers on a fundamental shift: moving away from broad-based price supports toward targeted assistance. The Fund argues that subsidies which carry high fiscal costs and suppress domestic price signals must be replaced by calibrated support for the most vulnerable households and viable firms.
The Fiscal Balancing Act: Deficits and Debt
The IMF’s projections reveal a volatile trajectory for Pakistan’s finances over the next several years. While the fiscal deficit is expected to dip to 3 per cent in FY2028 and 2.8 per cent in FY2029, it is forecast to climb again to 3.6 per cent in FY2030 and reach 4.6 per cent of GDP by FY2031.
This instability is mirrored in the primary balance—the gap between total revenues and expenditures excluding interest payments. The Fund expects the primary surplus to peak at 2.5 per cent this year, but warns it could fall drastically to 1 per cent by FY2030 and turn into nearly negligible at 0.1 per cent by FY2031.
On a more positive note, the IMF anticipates a steady decline in gross government debt. From a current estimate of 70.1 per cent of GDP, debt is projected to fall to 64 per cent by FY2028 and eventually reach 58.2 per cent by FY2031. This trend is supported by a reduction in debt-servicing costs, following a sharp drop in interest rates from a peak of 22 per cent to less than half that level.
| Fiscal Year | Fiscal Deficit (% of GDP) | Gross Gov Debt (% of GDP) | Primary Surplus (% of GDP) |
|---|---|---|---|
| Current Year | 3.2% | 70.1% | 2.5% |
| FY2027 | 3.2% | 67.1% | 2.0% |
| FY2028 | 3.0% | 64.0% | 2.0% |
| FY2029 | 2.8% | 60.8% | 2.0% |
| FY2031 | 4.6% | 58.2% | 0.1% |
Global Headwinds and Systemic Risks
The urgency of these domestic reforms is compounded by a precarious global financial environment. The IMF highlights that the global system is currently confronting the ongoing war in the Middle East, which threatens to trigger energy price surges, dollar appreciation, and higher global interest rates.
These external shocks are particularly dangerous for emerging market and developing economies. The Fund notes that global equity prices have already declined by 8 per cent since February. If the conflict in the Middle East is prolonged, global debt-at-risk—currently near 117 per cent of GDP—could increase by an additional 4 percentage points.
Beyond geopolitics, the IMF warns of a potential “AI correction.” A scenario where U.S. Stocks fall by 20 per cent due to a correction in artificial intelligence-related asset valuations could raise global debt-at-risk by another 2.4 percentage points, creating a ripple effect across global financial conditions.
The Path to Sustainability: What Needs to Change
To achieve “credible medium-term sustainability,” the IMF suggests that Pakistan must move beyond aspirational targets and implement concrete, well-sequenced consolidation measures. The core of this strategy involves expanding the tax base to ensure that government revenue—which the IMF expects to remain stable at around 15.5 per cent of GDP through 2031—actually grows to support public spending.
The Fund specifically warns against the risks of domestic instability and social unrest, noting that surges in unrest are historically associated with lower growth and wider primary deficits. It emphasizes the need to protect the independence of central banks to prevent inflation expectations and risk premiums from eroding borrowing credibility.
The advice on fuel and gas prices is explicit: domestic prices should continue to reflect international movements to support demand adjustment. By phasing out broad-based subsidies, the government can reduce “fiscally draining” expenditures and redirect those funds toward targeted social safety nets.
Disclaimer: This report is based on fiscal projections and economic analysis provided by the International Monetary Fund and is intended for informational purposes only. It does not constitute financial or investment advice.
The next critical checkpoint for Pakistan’s fiscal trajectory will be the implementation of these revenue-broadening measures and the monitoring of the primary surplus in the coming quarter. The government’s ability to adhere to the Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005 will be a key metric for international creditors and the IMF alike.
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