By Farooq Awan

Pakistan’s fiscal position strengthened during the first half of FY26 as total revenue increased to Rs10.684 trillion and expenditure declined to Rs10.142 trillion, helping the government post a rare fiscal surplus, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report showed total revenue rose from Rs9.764 trillion in H1-FY25 to Rs10.684 trillion in H1-FY26. As a share of GDP, revenue stood at 8.2 percent during the review period compared with 8.6 percent a year earlier.

Tax revenues increased to Rs6.729 trillion from Rs6.067 trillion, while FBR tax collection rose to Rs6.161 trillion from Rs5.625 trillion. Non-tax revenue also increased to Rs3.954 trillion from Rs3.696 trillion.

The report said SBP profit remained a major source of non-tax revenue, amounting to Rs2.428 trillion in H1-FY26. Petroleum Development Levy collection also increased sharply to Rs823 billion from Rs549 billion in the same period last year.

On the expenditure side, total spending declined from Rs11.302 trillion in H1-FY25 to Rs10.142 trillion in H1-FY26. Current expenditure fell from Rs10.118 trillion to Rs9.591 trillion.

The most important factor behind the expenditure decline was the sharp fall in mark-up payments. Interest payments dropped to Rs3.564 trillion in H1-FY26 from Rs5.142 trillion in H1-FY25, reflecting falling interest rates and debt reprofiling.

Lower debt-servicing costs created fiscal space for non-interest spending. Subsidies increased to Rs463 billion from Rs237 billion, while grants rose to Rs814 billion from Rs585 billion. Development expenditure and net lending also increased to Rs964 billion from Rs744 billion.

Public Sector Development Program spending rose to Rs1.106 trillion in H1-FY26 from Rs772 billion a year earlier. Provincial PSDP spending accounted for Rs950 billion, while federal PSDP spending stood at Rs156 billion.

The SBP said the increase in non-interest expenditure was partly linked to flood relief activities, while higher subsidies reflected government efforts to contain the accumulation of power-sector circular debt.

The fiscal improvement is significant because Pakistan has historically struggled with high debt-servicing costs that crowd out development and social spending. A reduction in mark-up payments gives the government more fiscal space to support growth without immediately expanding the deficit.

However, the report cautioned that non-tax revenue has been instrumental in keeping the fiscal deficit manageable during the last two years. Sustaining fiscal improvement over the medium term will require a continued increase in tax revenue rather than reliance on one-off or cyclical non-tax inflows.

The outlook remains exposed to external shocks. The SBP warned that higher oil prices following the Middle East conflict could increase subsidy needs and affect Petroleum Development Levy collection if petroleum sales volumes decline.

For FY26, the SBP projected the fiscal deficit within the range of 3.5 percent to 4.5 percent of GDP.

Credit: INP-WealthPk