Fuel levy yields lowest fiscal deficit in nearly three decades

• Gap shrinks to Rs856bn, or 0.7pc of GDP, during July-March
• Provincial surpluses, higher PDL collections, lower debt servicing drive improvement
• Revenue-to-GDP ratio falls; defence, pension, subsidy expenditures rise

ISLAMABAD: Supported by higher-than-targeted provincial contributions, strong petroleum levy collections and lower interest payments during the first three quarters of the current fiscal year, Pakistan recorded its lowest fiscal deficit in at least 27 years at 0.7 per cent of GDP, despite a decline in revenue ratios and increases in most expenditure heads except debt servicing.

According to official fiscal operations data released by the Ministry of Finance for July-March, the historically low fiscal deficit was achieved after a gradual reversal of the Rs2.1 trillion surplus, equivalent to 1.6pc of GDP, recorded in the first quarter (July-September) of the current fiscal year.

The budget surplus had narrowed to Rs542 billion (0.4pc of GDP) by the end of the first half and eventually turned into a fiscal deficit of Rs857bn by the end of the third quarter.

The data showed that petroleum levy remained the government’s largest revenue source, surging by 45pc to Rs1.205tr despite mounting public suffering caused by higher fuel prices amid the US-Israel war on Iran. The collection appears set to surpass the annual target of Rs1.468tr by a wide margin. During the same period last year, petroleum levy collection stood at less than Rs835bn.

The State Bank of Pakistan (SBP) also continued to post healthy profits thanks to a lagged impact of historically high interest rates.

However, the largest contribution came from the provinces, which exceeded their annual target by a big margin under the IMF’s $7bn Extended Fund Facility (EFF). The four provinces collectively posted a cash surplus of Rs1.636tr during the first nine months of the fiscal year, surpassing the full-year target of Rs1.464tr by Rs172bn.

With its larger fiscal muscle, Punjab contributed the highest provincial surplus of Rs824bn during July-March, followed by Sindh with Rs441bn. Khyber Pakhtunkhwa generated a surplus of Rs253bn, while Balochistan posted Rs118bn.

On top of this, interest payments dropped by almost Rs1.5tr to Rs4.948tr during the period compared to Rs6.44tr a year ago, showing a 23pc reduction.

The above savings helped the federal government in containing fiscal deficit to Rs856bn (0.7pc of GDP) compared to a Rs2.97tr deficit (2.6pc of GDP) last year, a massive turnaround of about 71pc.

The primary balance — the gap between total revenues and expenditures excluding interest payments — stood at 3.2pc of GDP in July-March compared to 3pc of GDP last year, showing little improvement in government expenses despite the so-called “rightsizing” and administrative reforms. In absolute terms, the primary surplus amounted to Rs4.1tr during the nine months against Rs3.468tr a year ago.

Despite these gains, the data reflected weakness in both revenue generation and expenditure management.

Overall revenue-to-GDP ratio dropped to 11.4pc during July-March compared to 11.7pc during the same period last year, despite strong growth in petroleum levy collections and SBP profits.

Tax revenues fell to 7.8pc of GDP from 8pc a year earlier, while non-tax revenues slipped to 3.6pc from 3.7pc. Direct tax collection remained unchanged at 3.6pc of GDP.

Sales tax collection declined to 2.4pc of GDP from 2.5pc last year, while customs duty declined to 0.7pc from 0.8pc. However, provincial tax collection improved slightly to 0.7pc of GDP from 0.6pc last year.

Overall expenditure dropped to 12.1pc of GDP from 14.2pc, mainly because current expenditure fell to 11pc of GDP from 12.7pc due to lower debt servicing costs. However, almost all other expenditure heads increased in both absolute terms and as a share of GDP.

Defence expenditure rose to Rs1.69tr (1.3pc of GDP) during the first nine months compared to Rs1.423tr (1.2pc of GDP) in the same period last year.

Expenditure on subsidies also increased both in absolute terms and as a share of GDP, reaching Rs632bn (0.5pc of GDP) compared to Rs466bn (0.4pc) last year.

The Ministry of Finance said Federal Board of Revenue collections reached Rs9.306tr during the first nine months, reflecting an increase of Rs853bn (10pc) over the same period last year.

It added that petroleum development levy collection rose by 45pc to Rs1.205tr, while provincial tax collection grew by 26pc to Rs861bn, an increase of Rs176bn that is “well above the assigned targets”.

Published in Dawn, May 13th, 2026