Shaukat Korai

Pakistan’s fiscal position showed notable improvement in the first quarter of FY26, with both the overall and primary balances posting surpluses, supported mainly by a sizeable profit transfer from the State Bank of Pakistan and restrained expenditure growth.

According to the Monetary Policy Committee’s (MPC) latest assessment, the expenditure-to-GDP ratio during Q1-FY26 remained lower than in the same period last year, contributing to the stronger fiscal outcome. Lower-than-expected interest payments are also likely to provide some relief over the full fiscal year, potentially helping the government contain the overall fiscal deficit.

However, revenue performance remains a key challenge. Growth in Federal Board of Revenue (FBR) tax collections slowed sharply to 10.2 percent year-on-year during July–November FY26. This suggests that a significant acceleration in tax receipts will be required in the remaining seven months of the fiscal year to meet the budgeted target. Despite anticipated savings on interest payments, the MPC cautioned that achieving the targeted primary surplus for the whole year could prove difficult.

In this context, the Committee underscored the importance of advancing structural reforms to strengthen fiscal buffers. It emphasized the need to broaden the tax base and push ahead with the privatization of loss-making state-owned enterprises, measures viewed as critical for creating fiscal space for public investment and higher spending on socioeconomic development.

On the inflation front, the MPC noted that headline inflation has remained within the medium-term target range over the past three months. It was observed that all three components—food, energy, and core inflation—are now broadly converging in line with earlier expectations. Policymakers attributed this trend to a prudent monetary policy stance supported by fiscal discipline, which together have helped stabilize prices despite recent supply-side frictions and relatively sticky core inflation.

Inflation expectations were also described as well-anchored. However, the MPC warned that inflation could rise above the target range toward the end of FY26 due to a low base effect from last year’s price levels. Inflation is expected to return to the target range in FY27 as these effects fade.

The inflation outlook, the Committee said, remains subject to several risks, including volatility in global commodity prices, the scale and timing of energy price adjustments, potential fiscal slippages, and uncertainty surrounding wheat prices, allied products, and other perishable food items.

Credit: INP-WealthPk