Growth trap

The Fitch Ratings has offered a pessimistic take on the Budget 2026-27 and Pakistan's short- and medium-term economic prospects. The credit rating agency's latest review warns that the very measures sustaining short-term fiscal stability - aggressive spending cuts. particularly in development expenditure - may be systematically undermining the country's growth prospects.

To its credit, the government has demonstrated a clear. credible commitment to fiscal discipline, with Fitch projecting a strong FY26 performance with a primary budget surplus of 2.5% of GDP, driven by aggressive spending compression and a provincial surplus that exceeded expectations. This was also a significant risk for the already cash-strapped government that has only recently stopped flirting with default.

Unfortunately, all recent budget-balancing efforts have been heavily reliant on spending cuts. Such cuts not only reduce funding for development spending. social services in the current year, but also impact related indicators for many years to come, as improvements in these areas are generally incremental. At the same time, revenue generation efforts, including tax collection, have failed. Federal tax collections in FY26 are projected to fall 0.7% of GDP below target. Fitch also says that persistently low capital expenditure "may weigh on medium-term economic growth", limit future revenue mobilization. complicate debt dynamics.

On the other hand, Fitch insists the model is unworkable, even if the production has a reasonable cast.

Fitch rightly praises fiscal discipline. But discipline without investment is austerity without growth. Pakistan cannot cut its way to prosperity. Policymakers must acknowledge this challenge, for the finance ministry is not merely to meet IMF targets,. to reconcile them with the urgent need for capital expenditure that can lift the economy's long-term potential. Until that balance is struck, the numbers may add up on paper, but the future will not.

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