Spending cuts to hit growth, warns Fitch

ISLAMABAD: Fitch Ratings on Tuesday warned that spending cuts stronger than anticipated, particularly the continued compression in capital expenditure, could weigh on medium-term growth prospects. In its review of the federal budget 2026-27, Fitch said Pakistan was maintaining a clear commitment to fiscal discipline under the International Monetary Fund programme by targeting a primary surplus of 2pc of GDP and an overall deficit of 3.6pc of GDP. This follows a strong FY26 performance, with a projected primary surplus of 2.5pc of GDP, driven by aggressive spending cuts and a provincial surplus of 1.1pc of GDP, exceeding its expectations. Amid revenue challenges, fiscal consolidation has relied heavily on expenditure compression, particularly cuts to capital spending, as in FY26, Fitch noted. While this has supported short-term deficit reduction, it will be difficult to sustain as a medium-term strategy. “Persistently low capex may weigh on medium-term economic growth, limit future revenue mobilisation, and complicate debt dynamics”, it said, adding that the scope for further reductions was narrowing, heightening the trade-off between fiscal adjustment and growth as spending pressures rise from a suppressed base. Praises fiscal discipline, but sees FY27 tax revenue target challenging On the other hand, it says that the policy momentum of fiscal consolidation improves near-term fiscal prospects, but Pakistan remains relatively vulnerable to inflation and under-performance on tax collection. Therefore, Fitch’s fiscal projections remain more cautious than the government’s, highlighting risks around the key targets. It noted that achieving the FY27 primary surplus will depend on sustained revenue over-performance relative to historical trends, which are challenging given structural weaknesses in tax administration and a limited pipeline of new tax measures. Federal tax collections in FY26 are officially projected to be 0.7 percentage points of GDP below target, underscor