The first full-year budget presented by the NPP government extends the fiscal momentum from recent years, particularly the strong 2025 performance, marking a shift toward sustained fiscal growth without major policy overhauls. Unlike previous budgets, often riddled with “crisis” references, this one aligns closely with IMF projections and the fiscal direction set in the budget presented in February 2025. Looking at all of this one big key takeaway for us this time is that the fiscal strategy in the 2026 budget sets the stage for significant overperformance in 2026 as well, similar to the current trend we are seeing in 2025, though vehicle imports will not be the primary driver of it next year, but rather the general economic activity picking up.
Focusing on some of the numbers presented, one factor that stood out was that the government revised its 2025 estimates, acknowledging its significant overperformance, this is something we’ve been talking about for quite sometime as well. Initially the budgeted revenue was set at 15.1% of GDP has been upgraded to 15.9% (~Rs. 5.1 Tn), fueled by robust economic activity, motor vehicle imports, and improved tax administration and collection. Conversely, expenditure has been largely contained for 2025. Salaries has remained broadly contained despite the April cost-of-living allowance increase, amid public sector retirements. Also the general fiscal overperformance has lowered interest rates broadly in 2025, and this overperformance has been utilized to pay down some short-term government securities, reducing interest costs. Capital spending, initially budgeted at 4% of GDP, saw only about one-fourth spent in the first six months, leading the government to revise its estimate to 3.2% of GDP. Due to all of this the government projects an improved primary surplus of 3.8% of GDP and a deficit of 4.5% for 2025, surpassing IMF expectations significantly and reflecting structural fiscal improvements.
Focusing on the 2026 budget, it projects modest revenue growth of Rs. 200 Bn to 15.3% of GDP. The largest revenue side adjustment is lowering the VAT and SSCL threshold from Rs. 60 Mn to Rs. 36 Mn starting April 2026, broadening the tax base. The government expects this to “just” boost VAT collections by Rs. 100 Bn and SSCL by Rs. 30 Bn. Looking at the data for 2025 we consider this estimate highly conservative. Regarding vehicle import revenue, it broadly looks like the government anticipates a dip in 2026, which seems fair, but what the government expects seems extremely conservative with the estimates indicating that the government expects vehicle imports for next year to be around the USD 75 Mn a month mark.
On the expenditure side, public salaries are expected to rise with phase two of the cost-of-living allowance in 2026. For us these figure seems inflated, as public sector employment has dropped significantly in the first half of 2025, and expected to continue. If net hiring continues to decline, salary costs could decrease further in the coming months. Additionally, fiscal overperformance is expected to continue in 2026 as well, with the budget indicating a Rs. 500 Bn T-bill paydown in 2026. If this fiscal overperformance exceeds expectations of the government, this paydown could be even higher, further reducing interest costs in the coming period.
Overall all of this highlights that next year could be a very strong fiscal year as well given that there’s revenue growth potential while expenditure could be broadly contained.
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