Islamabad, Feb 7: Pakistan’s public debt remained above sustainable levels in the last fiscal year, primarily due to significant interest payments that offset improvements from exchange rate stability and spending reductions, according to the Debt Policy Statement 2025. The government’s failure to meet its target of reducing the debt-to-GDP ratio to 56.75 percent by June 2024 saw the ratio instead reach 67.5 percent, signaling ongoing fiscal challenges.
Despite a reduction in the federal primary deficit and some economic growth driven by inflation, the country’s interest costs surged as the central bank raised its policy rate to 22 percent. This led to the government spending a staggering Rs. 8.2 trillion on interest payments alone. As a result, total public debt increased by 13 percent, reaching Rs. 71.2 trillion. Of this, domestic debt amounted to Rs. 47.2 trillion, while external debt stood at Rs. 24.1 trillion.
The report also criticized the government for failing to provide timely updates on key debt indicators, including those related to public-private partnership guarantees. Pakistan’s debt maturity profile remains concerning, with domestic debt averaging just 2 years and 8 months, leaving the government heavily reliant on short-term borrowing from commercial banks. Similarly, the maturity period for external debt has been shortened to just 6 years and 2 months, raising further concerns about sustainability.
In response to the growing debt burden, the finance ministry outlined plans to explore alternative funding sources, including Green Sukuk, sustainability-linked bonds, Panda bonds, and debt-for-nature or debt-for-climate swaps. These strategies aim to help manage the country’s debt obligations and mitigate the risks associated with short-term financing. However, the success of these measures will depend on the government’s ability to maintain fiscal discipline and implement effective structural reforms.
