The budgetary outcome

The outcome magnitudes of the fiscal operations by the federal and the provincial governments have been released recently. There is need for an early and in-depth review of these magnitudes as the IMF Third Review is due shortly. One of the key components of the review is the fiscal performance in the first six months of 2025-26.

The targets for the year are a 19 percent growth rate in FBR tax revenues. With the projected nominal GDP growth rate of 10.8 percent, this implies a significant increase in the federal tax-to-GDP ratio from 10.3 percent of the GDP in 2024-25 to 11.1 percent of the GDP in 2025-26. Provincial tax revenues are expected to increase by 17.5 percent and the petroleum levy by over 20 percent.

Federal current expenditure has been budgeted to rise by only 4 percent. This low growth will be achieved by 7.5 percent decrease in the outlay on debt servicing, due to the fall in interest rates. The growth rate in provincial current expenditure is projected at 12.8 percent.

Development expenditure is also to be contained with an increase of only 3.4 percent. The level of provincial development spending is actually expected to come down by 4.5 percent.

Overall, the expectations in the IMF Programme are that Pakistan will achieve substantial stabilization of public finances, with the budget deficit to come down significantly from 5.4 percent of the in 2024-25 to only 4 percent of the GDP in 2025-26. As highlighted above, this is to be achieved with a big increase in the tax revenues and strong containment of both current and development expenditures.

Based on the annual projections, targets have been set for various public finances magnitudes in the first six months of 2025-26.

The key targets are as follows:

(i) FBR revenues to reach Rs 6490 billion, with a growth rate of 15.4 percent.

(ii) Provincial tax revenues to rise to Rs 488 billion, with a growth rate of 10.4 percent.

(iii) Overall primary surplus of Rs 3,194 billion, compared the level in the first six months of 2024-25 of Rs3603 billion, a reduction of 11.4 percent.

(iv) Cumulative floor on new tax returns of 500,000.

(v) Floor on income tax revenues from retailers of Rs 366 billion by the end of December 2025.

(vi) Ceiling on net accumulation of tax refund arrears to only Rs 45 billion.

The first target evaluated is of FBR revenues. During the period, June to December 2025, the actual collection is reported at Rs 6,161 billion, with a growth rate of 9.5 percent. Therefore, the shortfall is Rs 329 billion. The consequence is that Rs 7970 billion will have to be collected in the next six months to achieve the annual target. This will require an extreme growth rate of 30 percent, as compared to the growth rate of 9.5 percent in the first half of 2025-26.

Turning to provincial tax revenues, there’s the good news that the actual collection in the first six months at Rs 568 billion has exceeded the target by Rs 80 billion. With a high growth rate of 28.5 percent, the annual target is likely to be achieved.

READ MORE: IMF programme: Country committed to achieving 1.6pc of GDP surplus: Aurangzeb

The next target is effectively the bottom line, with the focus on the overall primary surplus. It is expected to be sizeable and reach Rs 3,194 billion by the end of December. The actual level achieved is significantly higher by over 25 percent at Rs 4,108 billion.

However, the issue relates to the treatment of the large SBP surplus profits transferred to Islamabad. The Central Bank has adopted the policy of making one large lump-sum transfer in the first quarter of the year. This year it stands at Rs 2,428 billion.

The IMF calculation of the primary deficit in the first six months is probably not based on the full lump-sum transfer in these months. There are two possible paths adopted. The first is to take half the SBP profits for the first six months. As such, the primary surplus is lower by Rs 1,214 billion. Consequently, the actual primary surplus is down to Rs 2,894 billion. This is lower by Rs 300 billion with respect to the Programme target.

The second option is that the IMF has agreed to only 1 percent of the GDP to be shown above line as SBP profits. Consequently, these profits have to be taken at Rs 1,250 billion approximately. This methodology reduces the actual primary surplus to Rs

2,930 billion again significantly less than the target.

There is need also to look at the expenditure magnitudes in the first six months. Here there appears to have been significant success in containing current expenditure in the first six months by over 5 percent. This is due largely to reduction in debt servicing by over 30 percent, due to the big fall earlier in interest rates.

Development spending has shown a big increase due to the fiscal space created. It has increased by 29 percent. This is a positive development from the viewpoint of supporting the growth process in the country.

The other good news is that the provincial governments have generated large cash surpluses. The combined surplus was Rs 775 billion in the first six months of 2024-25. It has increased to Rs 1,179 billion in the first six months of 2025-26, implying a big increase of 52.1 percent. The biggest increase of 82.5 percent has been shown by the provincial government of Punjab. However, the target is Rs 1,500 billion for 2025-26.

There is one more worrying area in the public finances of the country. There is a net outflow of external financing of Rs 34 billion. This highlights the difficulty the federal government is having in accessing loans from multilateral institutions, international commercial banks and by flotation of bonds.

The overall assessment is that Pakistan has performed relatively well in meeting the public finance targets, with the solitary exception of the shortfall in FBR revenues. There will continue to be a need for accelerating the process of federal revenue generation, exercising economy generally in current expenditure and for continuation by the provincial governments of large cash surpluses.

Copyright Business Recorder, 2026