By S.M. Inam
Pakistan’s economy is navigating a precarious path, with debt obligations continuing to cast a long shadow over both defence and development spending. Data released on Friday by the Ministry of Finance reveals that in the first half of the current fiscal year, debt servicing consumed more than double the combined allocations for defence and the Public Sector Development Program (PSDP), highlighting the persistent fiscal squeeze under the International Monetary Fund (IMF) program. Between July and December, the country’s accumulated public debt demanded Rs3,563 billion in interest payments alone. In contrast, allocations for defence stood at Rs1,044 billion and the PSDP received a mere Rs238 billion.
The figures lay bare a stark reality: Pakistan is spending significantly more to service its existing obligations than to fund either national security or critical development projects. Analysts warn that such a trend may restrict the government’s capacity to invest in essential infrastructure, education, and healthcare, even as fiscal pressures mount. The Ministry of Finance’s report also flagged a persistent statistical discrepancy of Rs413.3 billion during the first half of this fiscal year, slightly lower than the Rs439.7 billion recorded in the same period last year. Punjab accounted for Rs144.4 billion of the total provincial discrepancy of Rs342 billion, pointing to challenges in provincial accounts and transparency.
Such discrepancies, though not unusual, complicate the government’s fiscal planning, particularly when the IMF closely monitors every element of budgetary allocation. Despite these pressures, the first half of the current fiscal year witnessed a surprising fiscal turnaround. The country recorded a fiscal surplus of Rs542 billion, a marked improvement from a deficit of Rs1,537 billion in the same period last year. This shift owes much to stringent fiscal discipline imposed under the IMF’s Extended Fund Facility (EFF) program. The primary balance, a key metric closely watched by the IMF, also showed a healthy surplus of Rs4,105 billion, equivalent to 3.2 percent of GDP, up from 3,600 billion or 3.1 percent of GDP during the same period last year.
These numbers suggest that Pakistan has, at least temporarily, managed to stabilize its public finances despite the ongoing debt burden. The IMF’s review mission, expected to visit Islamabad by the end of this month or early next, will undertake the third review of the $7 billion program. Their assessment is likely to shape the contours of the next budget for 2026-27, with a particular focus on taxation measures proposed by the Federal Board of Revenue (FBR). The government’s ability to balance fiscal consolidation with growth-oriented expenditure will be under intense scrutiny. Revenue mobilization remains central to this balancing act. Total revenues for the first six months of CFY 2026 reached Rs10,683 billion, with Rs6,160 billion collected by the FBR and Rs3,954 billion from non-tax sources.
The latter included a range of levies and profits that demonstrate the government’s increasing reliance on alternative revenue streams. Among these, the petroleum levy contributed Rs823 billion, while the State Bank of Pakistan’s profit, paid out in the first quarter, emerged as the largest single item, totaling Rs2,428 billion. Other non-tax revenues included Rs25.485 billion from the carbon levy, Rs8.8 billion from the Captive Power Plants (CPP) levy, Rs24.8 billion in profits from the Pakistan Telecommunication Authority (PTA), Rs61.14 billion in royalties on oil and gas, Rs26.7 billion from passport fees, and Rs32.3 billion through the natural gas development surcharge. Additional revenue streams, including Rs17 billion from the ICT administration and smaller receipts from various sectors, helped bolster the overall coffers.
While these figures underscore the government’s efforts to diversify revenue sources, they also reflect the growing pressure to maintain non-tax inflows to sustain the fiscal balance. The dominance of debt servicing over other critical expenditures raises broader questions about economic sustainability. The sheer scale of interest payments implies that for every rupee spent on defence or development, more than two rupees are directed towards satisfying past borrowings. Economists caution that this pattern, if unchecked, could stifle long-term growth, leaving the country vulnerable to external shocks and limiting the fiscal space needed for social welfare and infrastructure investments.
Moreover, the reliance on non-tax revenue highlights structural challenges in Pakistan’s taxation system. While levies on petroleum, profits from the State Bank, and surcharges on natural gas provide immediate fiscal relief, they are not a sustainable substitute for a broad-based, efficient tax regime. The IMF has consistently emphasized that for Pakistan to achieve medium-term fiscal stability, the government must expand its tax base, improve compliance, and reduce dependence on volatile non-tax receipts.
(The writer is a former government officer and a senior analyst on national and international affairs, can be reached at inam@metro-morning.com)
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