Pakistan’s FY26 Fiscal Deficit Slips to 1.6% of GDP Amid Public Debt of Rs83.29 Trillion, Raising Sustainability Concerns.

Pakistan’s fiscal situation in FY26 shows a paradox: headline figures suggest stability, but underlying debt and debt‑servicing costs reveal fragility. During the first 11 months of FY26 (July to May), the overall fiscal deficit fell to 1.6% of GDP, and for the July‑April period it reached 1.1% of GDP. Public debt stood at Rs83.29 trillion (about $298.5 billion) by the end of March 2026; interest payments alone consumed Rs6.16 tr in the same 11‑month span. The International Monetary Fund projects the fiscal deficit for FY27 at 3.2% of GDP. The Federal Board of Revenue failed to meet its IMF tax target by Rs975 billion, and debt servicing crowded out development spending. Within the power sector, capacity payments—fixed payments that recover capital costs and debt irrespective of electricity generation—are the leading source of fiscal strain. In FY25 consumers paid roughly Rs1.81 tr in capacity charges (≈Rs14.3 per unit), while the energy cost itself was about Rs9 per unit; capacity payments accounted for ~61% of the Rs2.94 tr electricity bill. Projections for FY26 indicate capacity charges close to Rs1.7 tr, or about Rs17 per unit, further amplifying consumers’ burden. Many early Independent Power Producer contracts include dollar‑indexed returns, causing payment obligations to rise as the rupee depreciates. CPEC‑linked projects, which account for over 11,000 MW of installed capacity financed largely in foreign currency, currently generate receivables of Rs543 bn to IPPs, adding pressure to finances. Circular debt fell from Rs2.39 tr to Rs1.61 tr during FY25 through extraordinary interventions, but rose again to approximately Rs1.84 tr by the close of FY26. In January 2025 the government renegotiated contracts with fourteen IPPs, replacing parts of the traditional take‑or‑pay model with arrangements tied to actual electricity generation; these revisions are expected to save about Rs1.4 tr over the contractors’ lifetimes. Nonetheless, CPEC‑related IPPs still hold roughly Rs1.4 tr in outstanding receivables and dominate the circular debt equation. The article notes that the root issue lies not in the presence of IPPs but in contract design that balances investor confidence with fiscal sustainability. Beyond the energy sector, Pakistan’s intergovernmental fiscal framework remains weak, meaning federal‑provincial resource sharing and fiscal governance require urgent reform. The World Bank’s ‘Strengthening Fiscal Federalism in Pakistan’ report, released last month, points out that the 18th Constitutional Amendment and the 7th NFC Award have devolved powers and resources to provinces, but fiscal imbalances and fragmented taxation persist. Following the report’s release, Prime Minister Shehbaz Sharif set up a high‑level committee to review its recommendations, with the goal of making Pakistan’s federal system more efficient, accountable and development‑oriented. These developments underscore that without a comprehensive overhaul of power‑sector governance and intergovernmental fiscal policymaking, durable fiscal relief is unlikely. (Source: Dawn, “In a fiscal conundrum”, published 10 August 2026)