Fitch Ratings has warned that Pakistan’s efforts to narrow its budget deficit through aggressive spending cuts could weigh on economic growth in the coming years, cautioning against excessive reliance on lower development spending to meet fiscal targets.

In its review of the federal budget for FY2026-27, the rating agency said Pakistan remained committed to fiscal discipline under the International Monetary Fund programme, with a primary surplus target of 2 percent of GDP and an overall fiscal deficit target of 3.6 percent of GDP.

However, Fitch noted that recent fiscal consolidation had largely been achieved through expenditure compression, particularly cuts in capital spending. While this approach had helped reduce the deficit in the short term, the agency said it would be difficult to sustain over the medium term.

It warned that persistently low capital expenditure could hurt medium-term economic growth, limit future revenue mobilisation and complicate debt dynamics, adding that the scope for further spending cuts was shrinking as expenditure pressures began to rise.

Fitch also described Pakistan’s tax collection target for FY2026-27 as challenging, citing structural weaknesses in tax administration and a limited pipeline of new revenue measures. It noted that federal tax collection in FY2025-26 was expected to miss official targets despite better performance.

The agency further pointed to risks stemming from the government’s reliance on provincial budget surpluses, saying such surpluses had historically been volatile and dependent on coordination between federal and provincial authorities.

Fitch said Pakistan’s debt servicing burden remained high because of a large stock of short-term domestic debt and relatively elevated borrowing costs. Interest payments, it said, were projected to consume 39.1 percent of government revenues in FY2026-27, far above the 12.1 percent median for countries with a similar B credit rating.

Pakistan currently holds a B- rating with a stable outlook from Fitch.