Spending cuts to hit growth, warns Fitch

Fitch Ratings has cautioned that Pakistan's commitment to fiscal discipline, while meeting International Monetary Fund (IMF) targets, could negatively impact its medium-term economic growth prospects. The warning comes as the country implements significant spending cuts, particularly affecting capital expenditure.

In its review of Pakistan's federal budget for 2026-27, Fitch highlighted the nation's adherence to the IMF program. Pakistan is targeting a primary surplus of 2% of GDP and an overall deficit of 3.6% of GDP. This follows a strong performance in FY26, where aggressive spending cuts and a provincial surplus contributed to a projected primary surplus of 2.5% of GDP, exceeding Fitch's expectations.

However, Fitch noted that amid revenue challenges, Pakistan's fiscal consolidation strategy has leaned heavily on reducing expenditures, especially capital spending. While this approach has successfully lowered the deficit in the short term, the ratings agency expressed concerns about its sustainability as a long-term strategy for economic development.

The continued compression of capital expenditure, which is crucial for infrastructure development and long-term productivity, raises concerns about Pakistan's ability to achieve sustained economic growth in the coming years. Fitch suggests that relying solely on spending cuts may not be a viable medium-term strategy.