Pakistan recorded a fiscal surplus of Rs1.274 trillion during the first quarter of fiscal year 2026-27, equivalent to 0.9% of gross domestic product (GDP), marking a substantial decline from the Rs2.119 trillion surplus, or 1.7% of GDP, reported during the corresponding period last year.
According to provisional fiscal operations data released by the Ministry of Finance, the country’s overall fiscal surplus declined by approximately 40% year-on-year during July–September 2026, primarily reflecting lower non-tax revenue and rising government expenditure.
The deterioration came despite a 7% increase in tax collections, as reduced profit transfers from the State Bank of Pakistan (SBP) and a 23% increase in interest payments weighed on the government’s financial position.
The country’s primary fiscal surplus, which excludes interest payments on public debt, also declined to Rs2.974 trillion, or 2.1% of GDP, compared with Rs3.497 trillion, or 2.8% of GDP, during the corresponding quarter of FY26.
Although the primary surplus remained marginally above the 2% of GDP full-year target under Pakistan’s International Monetary Fund (IMF) programme, the decline highlights growing pressure on public finances.
Government Revenue Declines Despite Higher Tax Collections
Pakistan’s total government revenue declined to Rs6.004 trillion during July–September 2026, compared with Rs6.200 trillion in the same period last year, representing a decrease of approximately 3%.
The reduction occurred despite an improvement in tax revenue, which increased from Rs3.153 trillion to Rs3.387 trillion, reflecting year-on-year growth of approximately 7%.
Collections by the Federal Board of Revenue (FBR) reached Rs3.086 trillion, compared with Rs2.884 trillion during the corresponding period of FY26.
However, higher tax receipts were insufficient to offset the decline in non-tax income.
Non-tax revenue fell by approximately 14%, from Rs3.046 trillion to Rs2.617 trillion, reducing the government’s overall revenue position.
As a percentage of GDP, total revenue declined from approximately 4.9% to 4.2%, indicating that government receipts represented a smaller proportion of the economy than during the same period last year.
The figures show that Pakistan’s fiscal performance remained heavily influenced by non-tax receipts, particularly the transfer of profits from the central bank.
State Bank Profit Transfers Fall 20% to Rs1.93 Trillion
One of the principal factors behind the declining fiscal surplus was the reduction in profit transfers from the State Bank of Pakistan.
SBP profit contributions to government revenue fell from Rs2.428 trillion in the first quarter of FY26 to Rs1.933 trillion in FY27, representing a year-on-year decline of approximately 20%.
The reduction amounted to nearly Rs495 billion, accounting for a substantial portion of the decline in government non-tax revenue.
Despite the decrease, SBP profit transfers continued to represent a major source of government income during the quarter.
The central bank’s contribution accounted for approximately 74% of total non-tax revenue, demonstrating the significant role these transfers played in supporting the fiscal balance.
Meanwhile, combined receipts from the petroleum development levy and carbon levy increased from Rs382 billion to Rs404 billion, reflecting growth of approximately 6%.
The increase in petroleum-related levy collections provided additional revenue but was insufficient to compensate for the decline in central bank profit transfers.
The figures also highlight the seasonal nature of Pakistan’s fiscal performance, as SBP profit transfers typically provide significant support to government revenues during the opening quarter of the financial year.
Consequently, the first-quarter surplus should not be interpreted as evidence that the government will necessarily maintain a positive overall fiscal balance throughout FY27.
Interest Payments Surge 23% to Rs1.7 Trillion
Rising debt servicing costs placed additional pressure on Pakistan’s fiscal position during the first quarter.
Government interest expenditure increased to Rs1.700 trillion, compared with Rs1.378 trillion during the corresponding period last year.
The increase of approximately Rs322 billion, or 23%, was among the major contributors to the rise in overall government expenditure.
The higher interest burden followed a 100-basis-point increase in the State Bank’s policy rate in May 2026, which contributed to elevated borrowing costs.
According to research by Topline Securities, the average yield on Treasury bills during the first quarter of FY27 stood at 11.6%, compared with 10.8% during the corresponding period of FY26.
Domestic government debt also increased by approximately 9% year-on-year in August 2026, contributing to the overall financing burden.
Interest payments consumed an amount equivalent to approximately 55.1% of FBR tax collections, compared with 47.8% in the corresponding quarter last year.
When measured against total tax revenue, the interest burden increased from 43.7% to 50.2%.
These ratios illustrate the pressure created by debt servicing costs, which continue to absorb a substantial share of resources available to the government.
However, interest expenditure declined by approximately 15% compared with the preceding quarter, when payments stood at Rs2 trillion.
The quarter-on-quarter decline reflected differences in debt servicing schedules, with significant maturities and interest obligations generally falling during the December and June quarters.
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Government Expenditure Rises 16% to Rs4.73 Trillion
Pakistan’s total government expenditure increased to Rs4.730 trillion during the first quarter of FY27, compared with Rs4.080 trillion during the same period last year.
The increase represents approximately 16% year-on-year growth.
Interest payments were a major contributor to the increase, although spending also rose across several other categories.
Excluding interest costs, overall government expenditure increased by approximately 12%.
Defence expenditure rose from Rs447 billion to Rs495 billion, representing an increase of approximately 11%.
Pension expenditure increased from Rs249 billion to Rs264 billion, reflecting growth of approximately 6%.
However, subsidies and grants declined from Rs439 billion to Rs366 billion, representing a reduction of approximately 17%.
The decrease in subsidies and grants partially offset higher spending in other areas.
Overall, the combination of declining total revenue and rising expenditure reduced the fiscal surplus by approximately Rs845 billion compared with the corresponding period of the previous year.
Development Spending Increases 59% During First Quarter
Development expenditure recorded a significant year-on-year increase during the July–September period.
Spending reported under the Public Sector Development Programme (PSDP) in the fiscal analysis rose to Rs468 billion, compared with Rs295 billion in the first quarter of FY26.
The increase represents approximately 59% year-on-year growth.
However, on a quarter-on-quarter basis, the same expenditure category declined by approximately 67% from Rs1.422 trillion recorded in the final quarter of FY26.
The substantial difference reflects the uneven distribution of development spending across the financial year.
The higher year-on-year expenditure indicates increased development-related outlays during the opening quarter, although the data do not independently establish the progress or completion of individual development projects.
As a percentage of GDP, the reported federal PSDP ratio stood at approximately 0.3%, compared with 0.2% in the corresponding period last year.
The increase in development-related spending came alongside higher interest and defence expenditure, placing additional demands on the government’s available resources.
Primary Fiscal Surplus Remains Above IMF Annual Target
Despite the decline in Pakistan’s overall fiscal surplus, the government maintained a positive primary balance during the first quarter.
The primary surplus stood at Rs2.974 trillion, equivalent to 2.1% of GDP, compared with Rs3.497 trillion, or 2.8% of GDP, in the same period last year.
This represents a year-on-year decline of approximately 15% in nominal terms.
A primary surplus occurs when government revenue exceeds expenditure after excluding interest payments on public debt.
It is an important measure of fiscal management because it indicates whether the government can cover its non-interest spending through available revenue.
Pakistan’s primary surplus of 2.1% of GDP during the first quarter was slightly above the 2% full-year primary surplus target identified in the IMF-supported fiscal framework.
However, the quarterly result cannot be directly treated as confirmation that the annual target has been achieved.
Fiscal performance can vary considerably across quarters due to changes in tax collections, expenditure schedules, central bank profit transfers and debt servicing requirements.
The opening quarter is particularly significant because the transfer of SBP profits provides substantial support to government revenue.
Sustaining the primary balance through the remaining nine months will therefore depend on revenue mobilisation and expenditure management.
Government Retires Rs2.5 Trillion in Bank Borrowing
Pakistan’s positive fiscal balance during the first quarter also contributed to a substantial reduction in government borrowing from the domestic banking system.
The fiscal surplus of approximately Rs1.274 trillion, combined with net external financing and non-bank domestic financing, facilitated the retirement of approximately Rs2.5 trillion in bank borrowing.
According to the fiscal analysis, net external financing reached Rs609 billion, while non-bank financing stood at Rs592 billion.
Gross external financing inflows amounted to approximately Rs1.25 trillion, including Rs910 billion in programme loans.
External repayments during the quarter reached approximately Rs638 billion, resulting in a positive net external financing position.
The figures indicate that the government relied partly on external and non-bank financing while reducing its net borrowing from domestic banks during the period.
No privatisation proceeds were recorded in the first quarter of FY27, compared with Rs4 billion reported during the final quarter of FY26.
Although the reduction in bank borrowing represents a significant financing development, it does not necessarily indicate an equivalent reduction in Pakistan’s total outstanding public debt.
Changes in domestic banking liabilities, external financing and other government obligations must be considered together when evaluating the country’s overall debt position.
Pakistan’s FY27 Fiscal Outlook Remains Under Pressure
Despite the positive opening-quarter balance, Pakistan’s fiscal outlook remains subject to considerable pressure from debt servicing costs and revenue requirements.
Topline Securities projects that the country’s overall fiscal deficit could reach approximately 3.6% of GDP during FY27, while the primary surplus is expected to stand at 2% of GDP.
The forecast indicates that the government could return to an overall fiscal deficit during the remainder of the financial year despite recording a surplus in the opening quarter.
The projected outcome reflects the distinction between seasonal first-quarter revenue receipts and fiscal performance across an entire financial year.
A decline in SBP profit transfers and continued pressure from interest expenditure could make fiscal management more challenging if they are not offset by stronger recurring revenue or expenditure restraint.
Tax revenue growth of approximately 7% during the first quarter provides some support to the fiscal position, although total government revenue declined because of weaker non-tax receipts.
At the same time, the increase in interest expenditure highlights the sensitivity of government finances to borrowing costs and the size of public debt.
The fiscal results therefore present a mixed picture, combining a continued primary surplus and lower bank borrowing with reduced overall revenue and higher expenditure.
What the First-Quarter Fiscal Results Mean for Pakistan
Pakistan’s fiscal performance during July–September 2026 demonstrates that maintaining a budget surplus does not necessarily indicate an improvement over the previous year.
Although the country recorded a positive fiscal balance of Rs1.274 trillion, the surplus was approximately 40% lower than the corresponding period of FY26.
The decline was primarily associated with reduced central bank profit transfers and higher government expenditure, particularly interest payments.
Meanwhile, tax collections continued to increase, development-related expenditure rose and the government recorded a primary surplus equivalent to 2.1% of GDP.
The results highlight the importance of distinguishing between short-term fiscal surpluses supported by large non-tax receipts and improvements in recurring government revenue.
With interest payments absorbing the equivalent of more than half of FBR tax collections during the quarter, debt servicing remains a major challenge for Pakistan’s public finances.
The outlook for the remainder of FY27 will depend on whether the government can sustain revenue growth, contain borrowing costs and manage expenditure while meeting its fiscal commitments.
For now, the figures show that Pakistan has maintained a positive fiscal balance for the opening quarter, but the substantial year-on-year reduction in the surplus underscores the continuing pressures facing the country’s finances.