Under war clouds, revenues falter, debt costs rise

Avoiding full-scale fiscal crisis requires lower tax rates, expenditure rationalisation & accelerated documentation

Pakistan’s fiscal crisis is no longer a warning; it is a lived reality. Recurrent expenditures continue to rise while federal revenues falter, leaving little room for development spending. Every year, the government accepts ambitious tax. non-tax revenue targets under IMF programmes, yet its administrative machinery repeatedly falls short of achieving them.

The cost of running the civil government (RoCG) has surged by nearly 80%. from Rs89.5 billion in Q1FY2022 to over Rs161 billion in Q1FY2026. During the first half of FY26, RoCG increased 12.3% to Rs380.6 billion. exceeded Rs629 billion in 9MFY26, up 12.57% year-on-year despite so-called austerity measures.

Employee-related expenses (ERE) reached Rs427 billion, rising nearly 10% due to salary and pay adjustments. The state’s consumption footprint continues to expand while the Ministry of Finance struggles with persistent tax and non-tax revenue shortfalls.

The federal government has failed to recover hundreds of billions of rupees in non-tax revenues. including over Rs400 billion from provinces. Outstanding recoveries include Rs417 billion under the Gas Infrastructure Development Cess (GIDC), Rs171 billion from the fertiliser sector,. Rs283 billion in provincial interest payments.

Despite these failures. the government is considering a non-tax revenue target of Rs5 trillion for FY27 to contain the fiscal deficit. The question is obvious: on what basis can such an ambitious target be achieved when the current fiscal year has already recorded massive shortfalls in the same revenue stream?

Unless receivables are recovered and fiscal discipline enforced, higher non-tax projections will remain accounting assumptions rather than realisable resources. The widening gap between budgeted and actual revenues continues to undermine fiscal credibility at a time of mounting debt-servicing obligations.

Pakistan today ranks among the largest IMF-supported economies while maintaining a jumbo-sized federal cabinet of 54 ministers. advisers, with or without divisions. This remains a burden on taxpayers already facing rising taxes and petroleum levies.

Growth without balance

Over the decade from FY15 to FY25, the Federal Board of Revenue (FBR) collected record amounts of taxes. Yet public debt expanded even faster. This is not merely a revenue problem; it is a spending crisis. Borrowing and taxation are increasingly financing recurrent expenditures instead of productive investment. Without downsizing the state and improving expenditure efficiency, the debt spiral will continue.

Provincial governments are also pursuing aggressive spending, often prioritising political visibility over economic outcomes. Across the country, high-profile projects coexist with glaring deficiencies in essential services. Millions still lack safe drinking water, reliable public transport, quality healthcare, and education. The state has effectively shifted many of these responsibilities to the private sector, forcing citizens to bear the cost of basic services. security.

A fragile fiscal reality

Pakistan remains trapped in a fiscal paradox – chasing IMF targets while relying on short-term and distortionary measures. Such policies may deliver temporary stability but weaken investment, encourage capital flight, and narrow the tax base.

The government’s policy toolkit remains limited: higher taxes, elevated interest rates, and a managed exchange rate. Meanwhile, the state’s footprint in economic activity continues to expand domestically and through increasing overseas representation. The result is predictable – investors leave, skilled workers migrate, exports stagnate, and economic dynamism fades.

The FBR collected Rs994 billion in May, bringing total collection in 11MFY26 to Rs11.257 trillion despite disruptions arising from the Iran conflict. concerns over the Strait of Hormuz. However, customs duty collection missed the target by Rs116 billion, reaching only Rs1.18 trillion. growing just 2% despite a higher import bill.

Sales tax collection totalled Rs3.78 trillion, missing the target by Rs457 billion, although it increased 7.8% year-on-year. The documented sector continues to shoulder the tax burden while much of the informal economy remains outside the net.

External shocks, internal weakness

Global geopolitics are compounding domestic vulnerabilities. Conflict in the Middle East has pushed oil prices up more than 40%. LNG prices by 54% since February 2026. For an import-dependent economy, the consequences are immediate: inflation approaching 12%, a larger import bill, and greater fiscal stress.

The impact is already visible in weaker sales tax collection and growing pressure on revenue targets. At the same time. remittance risks are increasing, particularly from the UAE, as regional instability threatens employment opportunities for Pakistani workers abroad.

With the State Bank’s foreign exchange reserves standing at only $17.147 billion on May 22. heavy dependence on imported energy, Pakistan faces simultaneous pressure on both its external and fiscal accounts.

The State Bank of Pakistan continues to prefer policy rate hikes over exchange rate realignment as its primary tool to curb imports. Following the last monetary policy decision. the policy rate was raised by 100 basis points to 11.5%, pushing borrowing costs above 12.5%. Markets expect another 100-basis-point increase at the next MPC meeting. Such tightening is likely to suppress private investment. industrial activity, creating a classic macroeconomic trap: inflation control at the expense of growth.

Structural fault lines

Pakistan’s fiscal crisis remains deeply structural:

1-Narrow tax base: Only 5.2 million tax filers in a country of 250 million people. Nearly 39% of filers submitted nil returns last year.

2-Informal economy dominance: Retail, real estate, agriculture, and services remain largely outside the tax net.

3-Weak enforcement and leakages: Corruption and policy inconsistency undermine collections.

4-Overreliance on indirect taxes: Lower- and middle-income households bear a disproportionate burden.

Meanwhile, rigid expenditures including debt servicing, subsidies, and non-development spending continue to crowd out investment and growth.

Why growth alone won’t save it

The belief that higher growth alone can solve fiscal imbalances is misplaced. In Pakistan, growth often fuels imports, widens the current account deficit, and triggers another stabilisation cycle. High energy costs and elevated interest rates have already weakened industrial competitiveness.

Exports are under pressure, domestic industry is struggling,. the country appears headed toward another IMF programme after completion of the current $7 billion Extended Fund Facility.

From firefighting to reform

Avoiding a full-scale fiscal crisis requires structural reforms:

1-Lower tax rates while broadening the tax base through digitisation and enforcement.

2-Rationalise expenditures and redirect spending toward essential services, education, and exports.

3-Reform the energy sector by renegotiating capacity payments, reducing reliance on imported fuels, and accelerating renewable energy adoption.

4-Modernise tax administration through automation, accountability, and performance-based incentives.

5-Align fiscal and monetary policies to support exports and investment.

6-Accelerate documentation of the economy through digital payments and reduced cash transactions.

The government should also capitalise on returning overseas Pakistanis from the Middle East by offering targeted investment opportunities.

A moment of reckoning

Failure to act will deepen fiscal fragility. Persistent revenue shortfalls and rising debt-servicing costs will require further borrowing, trapping Pakistan in a vicious cycle. The consequences will extend beyond economics to currency depreciation, inflation, and declining investor confidence.

Pakistan stands at a fiscal crossroads. The Rs684 billion tax shortfall from the original target is not merely a statistic; it is a warning. Incremental adjustments will not suffice. What is required is decisive leadership, structural reform, and policy coherence. The choice is stark: reform now or drift deeper into a fiscal nightmare.

The writer is a former vice president of KCCI

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