Pakistan’s fiscal deficit fell to Rs3.3 trillion, or 2.6% of GDP, in FY26, marking the country’s lowest deficit since FY18 and a substantial improvement over the previous fiscal year.

The deficit stood at 5.4% of GDP, or Rs6.2 trillion, in FY25, meaning the fiscal gap narrowed by nearly half during FY26.

The stronger fiscal outcome was supported mainly by a reduction in government spending, particularly debt servicing costs, along with faster growth in revenues.

Total expenditure declined by around 4% year-on-year during FY26, while interest payments fell approximately 22% as borrowing costs eased and debt management improved.

The average Treasury bill yield during the year was around 11.03%, down from 13.63% in FY25.

Government spending excluding interest payments increased by about 5.6%, remaining below the roughly 10% growth recorded in total revenues.

Pakistan also recorded a primary surplus of Rs3.6 trillion, equivalent to 2.9% of GDP, compared with Rs2.7 trillion, or 2.4% of GDP, in FY25.

The result surpassed the IMF’s FY26 primary surplus target of 2.5% of GDP.

Fiscal performance also improved during the final quarter of the year. The fourth-quarter fiscal deficit stood at 1.9% of GDP, compared with 2.8% during the corresponding period of FY25.

The primary deficit for the quarter narrowed to 0.4% of GDP from 0.7% a year earlier.

Despite the annual decline, quarterly interest payments remained substantial. Interest expenditure reached approximately Rs2 trillion in 4QFY26, down 18% year-on-year even as domestic debt increased.

On a quarter-on-quarter basis, interest costs increased 44%, largely reflecting the timing of major debt maturities and related payments during the December and June quarters.

Government expenditure on subsidies and grants also declined significantly, falling 29% to around Rs1 trillion during FY26.

The remaining fiscal gap was financed through domestic and external sources. Bank financing amounted to around Rs2.2 trillion, while non-bank financing recorded a net retirement of approximately Rs99 billion.

Privatization proceeds contributed around Rs4 billion, while external financing increased by approximately Rs1.2 trillion during the year.

The improved FY26 fiscal position provides some relief, although fiscal pressures are expected to increase in FY27. The fiscal deficit is projected at around 3.6% of GDP, while the primary surplus is expected to moderate to approximately 2% of GDP.

The FY26 outcome nonetheless represents a major improvement in Pakistan’s fiscal position, with lower interest costs, stronger revenue growth and tighter expenditure growth driving the reduction in the overall deficit.