‘B’-rated countries: Budget’s interest-to-revenue ratio higher than median rate: Fitch

ISLAMABAD: The 2026-27 budget’s interest-to-revenue ratio, projected at 39.1 percent, is substantially higher than the median ratio of 12.1 percent for ‘B’-rated peers. This limits fiscal flexibility and crowds out priority spending, constituting a key weakness in Pakistan’s ‘B-’ sovereign rating with a Stable Outlook, Fitch Ratings said.

The ratings agency further noted that Pakistan’s overall fiscal deficit, projected at 3.6 percent of GDP in fiscal year 2027, also remains higher than the median deficit of 3 percent for ‘B’-rated countries.

Fitch Ratings sees Pakistan’s budget for the fiscal year ending 30 June 2027 (FY27) as maintaining a clear commitment to fiscal discipline under the International Monetary Fund (IMF) Extended Fund Facility by targeting a primary surplus of 2 percent of GDP and an overall deficit of 3.6 percent of GDP.

READ MORE: Fitch Ratings affirms Pakistan’s long-term debt ratings at B-, outlook stable

“This follows a strong fiscal year 2026 performance, with a projected primary surplus of 2.5 percent of GDP, driven by aggressive spending cuts and a provincial surplus of 1.1 percent of GDP, exceeding our expectations”, the ratings agency added.

Fitch says this policy momentum improves near-term fiscal prospects, but Pakistan remains relatively vulnerable to inflation and under-performance on tax collection.The ratings agency stated that

“Our fiscal projections remain more cautious than those of the government, illustrating risks around the key targets.

Achieving the fiscal year 2027 primary surplus will depend on sustained revenue performance relative to historical trends, which we view as challenging given structural weaknesses in tax administration and a limited pipeline of new tax measures”, it added.

Federal tax collections in fiscal year 2026 are officially projected to be 0.7pp of GDP below target, underscoring persistent challenges in meeting ambitious revenue goals.

The fiscal year 2027 tax revenue target (10.6 percent of GDP) would be a record, building on improved collection in fiscal year 2026. Non-tax revenues, including profit transfers from the State Bank of Pakistan, are, meanwhile, set to decline in fiscal year 2027.

The reliance on a large provincial surplus is another source of uncertainty, given historical variability and coordination challenges between federal and provincial governments.

The ratings agency stated that amid revenue challenges, fiscal consolidation has relied heavily on expenditure compression, particularly cuts to capital spending, as in FY26. While this has supported short-term deficit reduction, it will be difficult to sustain as a medium-term strategy.

Persistently low capex may weigh on medium-term economic growth, limit future revenue mobilisation and complicate debt dynamics. The scope for further reductions is narrowing, heightening the trade-off between fiscal adjustment and growth as spending pressures rise from a suppressed base.

It further stated that interest costs remain structurally elevated due to Pakistan’s large stock of short-maturity domestic debt and high market yields. A rising policy rate as inflation rises due to higher world energy costs compounds the risk of overspending on interest payments.

On the external side, Pakistan’s recent US dollar bond issuance at just under 7 percent yield demonstrates improved access to international capital markets and bolsters near-term liquidity. Pakistan also issued a panda bond in 2026, further marking improved external market access.

However, maturities have been short (three years), and medium-term external refinancing risks and structural vulnerabilities in Pakistan’s debt profile remain. Continued dependence on multilateral funding and financial assistance from bilateral partners—particularly from China and the Gulf Cooperation Council—leaves Pakistan exposed to shifts in creditor confidence and FX reserve adequacy.

Fiscal consolidation remains dependent on sustained primary surpluses and improved revenue performance, with the credibility of budget targets, sustainability of provincial surpluses, and the developments around growth and interest costs central to the success of Pakistan’s IMF programme and our rating consideration, Fitch Ratings added.

Copyright Business Recorder, 2026