Pakistan's finance update shows mixed picture as economists dispute debt claims

Pakistan's Finance Division has published its September Update and Outlook, presenting what the accompanying editorial describes as a mixed bag of achievements linked to International Monetary Fund conditions under the ongoing Extended Fund Facility and failures tied largely to the Middle East conflict. The Update reports that the current account deficit declined from negative $853 million in July-August 2026 to negative $543 million in the same two months in the current year. The trade deficit, however, widened to $6.16 billion in the first two months of 2026-27 from $5.16 billion in the same period of the previous fiscal year, which the Update attributes to higher prices for petroleum and products amid the conflict. Exports to the Middle East rose by $0.2 billion, it says.

The narrowing current account deficit rests on two main factors, according to the Update: a 14.7 percent rise in remittance inflows, which surveys cited by the Update link to the conflict as Pakistani emigrants have not returned home in the same numbers as nationals of some other countries; and slower debt growth of 7.7 percent this year against 13 percent last fiscal year. The Debt Management Office, under the Ministry of Finance, claims this slowdown reflects fiscal consolidation, a primary surplus and reduced interest payments. Independent economists dispute those claims, pointing to higher tax collections driven by enforcement measures that increased scrutiny of sales tax at the factory level in the sugar, cement and fertiliser sectors, even as revenue from sales and withholding taxes fell because of the Gulf crisis.

The editorial argues that the net impact of these indirect taxes, whose incidence falls more heavily on the poor, has been to raise food inflation and hurt vulnerable households. It notes the World Bank calculates Pakistan's poverty rate at 44 percent. The government has controlled the primary surplus, defined as revenue minus expenditure excluding interest payments on national debt, but interest payments comprised 46 percent of total current expenditure and 43 percent of the total budget. That assumes a policy rate that is not likely to be raised, though the editorial warns this assumption may fall by the wayside as inflation has risen from 3.1 percent in August 2025 to 11.1 percent in August 2026, a shift blamed on the conflict.

Other indicators are concerning. Large-scale manufacturing growth was 8.93 percent in July 2025, well above the year's estimate of 4.98 percent, but fell to 3.03 percent in July 2026. The editorial attributes this to higher utility costs stemming from IMF conditions and a decline in credit to the private sector, from negative 170 million rupees in July-August 2025 to negative 364.5 million rupees in July-August 2026. The government's recent $3 billion dual tranche sovereign Eurobond on the London Stock Exchange carried rates above those available from multilateral and bilateral lenders: $1.75 billion for 5.5 years at 7.5 percent and $1.25 billion for 10 years at 7.9 percent. The issuance post-dates the budget and is in all probability not included in budget estimates.

The Update's recommendation going forward is that the priorities are to accelerate revenue mobilization, keep relief measures temporary and targeted, and sustain progress on energy and tax reforms, adding that together these would consolidate stability and lay the basis for durable private sector-led growth. The editorial takes a different view, arguing that the recommendation should have been to formulate and implement a tax structure ensuring higher collections under direct or ability-to-pay taxes, and that tariffs must focus on reducing inefficiencies rather than passing the burden onto consumers.