EDITORIAL: While the FY2026-27 budget has been framed as a pro-growth package aimed at reviving economic activity after years of stabilisation, the finance ministry’s own statement of fiscal risks underscores that its projections remain exposed to multiple downside vulnerabilities, with the growth narrative dependent on a range of assumptions holding steady.
Submitted to parliament under the Public Finance Management Act 2019 on June 14, the document flags several broad risk areas spanning macroeconomic and revenue pressures, debt servicing, state-owned enterprises and climate change among others. Together, these factors could potentially widen the fiscal deficit and undermine key budget assumptions over the coming year.
Among the most immediate vulnerabilities highlighted by the finance ministry is the prospect of a spike in global oil prices driven by tensions in the Middle East. Such a development would have cascading consequences for budgetary assumptions and the wider economy.
To cushion consumers from the full impact of higher fuel costs, the government may be forced to increase energy subsidies while also sacrificing a portion of petroleum levy revenues by limiting the pass-through of international prices. The fiscal cost could be considerable: a $40-per-barrel increase in oil prices may widen the fiscal deficit by 0.8 percent of GDP. Moreover, higher energy prices would also raise the cost of doing business, erode household purchasing power and dampen economic activity, potentially slowing growth and weakening tax collections.
A one percentage point decline in real GDP growth could lower revenues through reduced tax collection while adding to expenditure pressures, particularly on social safety nets, with the combined impact widening the fiscal deficit by around 0.2 percent of GDP. Concurrent inflationary pressures and exchange rate depreciation could further strain public finances. While the prospects of a US-Iran peace deal now offers hope that risks from volatile oil prices may remain contained, the region’s recent history of instability tells us that adverse scenarios cannot be ruled out entirely.
Beyond external shocks, the ministry has also flagged significant domestic vulnerabilities. Revenue collections remain exposed to lower tax elasticity, weaker-than-expected non-tax receipts and persistent structural constraints in reducing the tax gap, all compounded by a chronically narrow tax base with limited expansionary momentum on this count in the budget.
Given this, even a 10 percent shortfall in tax revenue growth relative to budgetary projections could reduce revenues by around 0.7 percent of GDP. Debt servicing also remains a key area of vulnerability, with fiscal outcomes highly sensitive to shifts in interest rates, exchange rate movements and refinancing conditions. Any tightening in domestic or external borrowing costs, alongside greater reliance on short-term financing, could significantly raise interest payments and strain the fiscal deficit. SOEs add another layer of pressure, with weak dividend transfers and potential increases in government support for losses or liquidity needs further weighing on the fiscal position.
Climate and disaster-related risks pose some tough trade-offs. A mitigation pathway aligned with RCP 2.6 – a low-emissions scenario that assumes early, aggressive action to curb greenhouse gases – would require higher upfront spending on adaptation measures. While this strengthens long-term resilience, it comes at an immediate budgetary cost by widening the fiscal deficit. By contrast, a higher-emission trajectory may appear less costly initially, but carries rising long-term fiscal risks through more frequent and severe climate shocks. Natural disasters remain among the most significant pressures, with a single average event capable of pushing the fiscal deficit to around 1.5 percent of GDP.
Ultimately, the breadth of risks outlined underscores that the budget’s stability rests on a delicate balance of assumptions, where even modest shocks could quickly test fiscal limits. Offsetting these will require disciplined policy execution, credible revenue mobilisation and a sustained effort to build fiscal buffers against uncertainty.
Copyright Business Recorder, 2026