By Hasan Salahuddin

Pakistan’s fiscal deficit narrowed to 5.4% of its GDP in FY25, reflecting improved fiscal discipline and consolidation efforts, according to the Financial Stability Review 2025 released by the State Bank of Pakistan (SBP).

The report highlights that the reduction in the fiscal deficit from 6.8% in the previous year was supported by better revenue mobilization and controlled government expenditures. At the same time, the country recorded a primary surplus, indicating that revenues exceeded non-interest expenditures, which is a key indicator of improving fiscal health.

The SBP noted that fiscal consolidation played an important role in stabilizing the broader macroeconomic environment. By reducing borrowing requirements and easing pressure on public finances, the government’s fiscal efforts helped support monetary policy objectives and lower inflationary pressures during the year.

Improved fiscal indicators also had a positive impact on investor confidence and external perceptions of the economy. The report points out that better fiscal management, along with progress under the International Monetary Fund programme, contributed to an improvement in Pakistan’s credit ratings and a decline in country risk premiums.

The narrowing of the fiscal deficit also helped strengthen debt dynamics by slowing the pace of public debt accumulation. With a more balanced fiscal position, the government was able to reduce reliance on domestic and external borrowing, which in turn supported financial stability and reduced vulnerabilities in the economy.

In addition, fiscal consolidation created space for the private sector by easing crowding-out effects, allowing financial resources to be allocated more efficiently toward productive economic activities. This shift is expected to support investment and economic growth over the medium term.

The report further notes that maintaining fiscal discipline will remain critical for sustaining macroeconomic stability. Continued efforts to broaden the tax base, improve revenue collection, and rationalize expenditures will be necessary to keep the fiscal deficit under control and ensure long-term sustainability.

However, the SBP cautioned that fiscal risks persist, particularly amid external uncertainties, rising global commodity prices, and potential pressures on government spending. Any slippages in fiscal management could reverse the gains achieved and impact overall economic stability.

Sustained fiscal consolidation, combined with prudent monetary policy and structural reforms, will be essential to maintaining economic stability and supporting long-term growth.

Credit: INP-WealthPk