Islamabad: The federal government has cautioned that a combination of rising global oil prices, slower economic growth, weaker-than-expected revenue collection, increasing debt servicing costs, and climate-related shocks could jeopardise its fiscal targets for the upcoming financial year, underscoring the fragile nature of Pakistan’s public finances despite recent signs of macroeconomic stability.
In a Fiscal Risk Statement submitted to Parliament alongside the Federal Budget 2026-27, Finance Minister Muhammad Aurangzeb and Finance Secretary Imdad Ullah Bosal identified seven major risks that could widen the budget deficit during FY2026-27.
Prepared under the requirements of the Public Finance Management Act 2019, the report outlines vulnerabilities linked to macroeconomic conditions, revenue performance, debt obligations, state-owned enterprises (SOEs), climate change, natural disasters, and contingent liabilities arising from commodity financing guarantees.
The government highlighted a sharp rise in international oil prices as one of the most significant threats, particularly amid heightened tensions in the Middle East. According to the report, higher crude prices could reduce petroleum levy collections if the government chooses not to pass the full burden onto consumers. At the same time, authorities may be forced to increase subsidies to cushion households from rising inflation.
The finance ministry estimated that a $40 per barrel increase in global oil prices could widen the fiscal deficit by 0.8 percent of GDP in FY27. Finance Minister Aurangzeb noted that a substantial portion of the more than Rs1.035 trillion in special grants secured from provinces had been allocated to address the potential economic fallout stemming from regional conflicts.
The report also warned that slower economic growth could place additional pressure on public finances. A decline of just one percentage point in real GDP growth could reduce tax revenues while increasing demand for social protection spending, expanding the fiscal deficit by an estimated 0.2 percent of GDP.
Revenue collection remains another area of concern. The government cautioned that weaker economic activity, lower tax responsiveness, and reduced non-tax revenues could undermine fiscal projections. It estimated that if tax revenues grow 10 percent below budget expectations, the fiscal deficit could widen by 0.7 percent of GDP.
Additional vulnerabilities include lower transfers of profits from the State Bank of Pakistan (SBP) and weaker petroleum levy receipts. The report stated that a 30 percent decline in SBP surplus profits could increase the deficit by 0.3 percent of GDP, while a 20 percent shortfall in petroleum levy collections could add another 0.2 percent of GDP to the deficit.
The finance ministry also identified tax exemptions and concessions as a structural risk, estimating that expanded tax expenditures could widen the budget deficit by as much as 1.3 percent of GDP.
Debt servicing costs continue to pose a major challenge. According to the report, a 200-basis-point increase in domestic interest rates, coupled with a 100-basis-point rise in external borrowing costs, could increase the fiscal deficit by 0.4 percent of GDP. Under a more severe scenario involving refinancing pressures and increased reliance on short-term borrowing, the impact could reach 0.8 percent of GDP.
State-owned enterprises remain another persistent source of fiscal risk. While a 6 percent shortfall in dividend payments from government-owned entities would have only a limited effect—raising the deficit by 0.02 percent of GDP—additional support to loss-making SOEs amounting to 1.5 percent of GDP could increase the deficit by 0.4 percent of GDP.
The report further highlighted the growing fiscal burden associated with climate change. Spending under a low-emissions adaptation pathway aligned with the RCP 2.6 climate scenario could raise the deficit by 0.2 percent of GDP, as the government invests in resilience-building measures and green infrastructure. Under the more severe RCP 8.5 scenario, the immediate impact is estimated at 0.01 percent of GDP, although climate-related risks are expected to intensify over time.
Natural disasters were identified as one of the most serious threats to fiscal stability. In the absence of dedicated disaster-risk financing mechanisms, the government estimated that an average disaster event could increase the fiscal deficit by as much as 1.5 percent of GDP.
The report also flagged contingent liabilities arising from government guarantees issued for commodity financing operations. Assuming a 25 percent probability that these guarantees are called, the fiscal deficit could rise by 0.1 percent of GDP.
The fiscal risk assessment accompanies Pakistan’s Rs18.77 trillion Federal Budget for FY2026-27, which targets 4 percent economic growth and aims to contain the fiscal deficit at 3.6 percent of GDP. The government continues to balance its commitments under the International Monetary Fund (IMF) programme while pursuing economic recovery, fiscal consolidation, and measures to protect vulnerable segments of society.
The report serves as a reminder that while economic indicators have shown signs of improvement, Pakistan’s fiscal outlook remains highly sensitive to both domestic and external shocks.
