Pakistan’s Economy Sees Fiscal Surplus, Driven by Central Bank Profits

KARACHI: Pakistan’s economy recorded a fiscal surplus of 1.6% of GDP in the first quarter of Fiscal Year 2026, amounting to Rs2.1 trillion. This compares to a surplus of 1.7% in the same period last year and a deficit of 2.8% in the previous quarter. A significant contributor to this surplus was a substantial profit of Rs2.42 trillion from the State Bank of Pakistan (SBP).

The primary surplus for the quarter stood at 2.7% of GDP, or Rs3.5 trillion, slightly lower than the 2.8% recorded in the first quarter of Fiscal Year 2025. The SBP’s profits, credited annually due to a recent amendment, played a crucial role, as the central bank reported higher profits due to record high Open Market Operation positions in the previous fiscal year.

After adjusting for the SBP profit, the fiscal deficit was 0.2% of GDP, while the primary surplus was 0.8%. This is a slight improvement from the fiscal deficit of 0.5% and the primary surplus of 0.6% in the first quarter of the previous year.

The government utilized the surplus to retire Rs2.0 trillion in domestic borrowing and Rs38 billion in external borrowing. However, interest expenses rose by 5% year-on-year to Rs1.4 trillion, attributed to increased borrowing levels. Future interest expenses are expected to rise further due to upcoming maturities and payments.

The Federal Board of Revenue’s tax plus Petroleum Development Levy to GDP ratio increased to 2.51%, while Public Sector Development Program (PSDP) spending remained steady at 0.23%-0.24% of GDP. Development expenditure reached Rs295 billion, marking a 7% year-on-year increase, and defense expenses rose by 9%.

Transfers to provinces were 56.3% of tax revenues, nearly unchanged from 56.4% last year. Analysts anticipate a fiscal deficit of 4.6% of GDP for Fiscal Year 2026, exceeding the government’s target of 3.9%, due to anticipated flood-related expenditures and potential revenue losses.