ISLAMABAD: The Finance Ministry on Thursday admitted that Pakistan has once again breached its legal public debt limit, with the debt-to-GDP ratio climbing to 70.2 percent, far above the 60 percent ceiling set under the law.
“The debt contracted was 70.2 percent by the end fiscal year 2025, against the ceiling limit of 60 percent debt-to-GDP ratio,” said Director General Debt Finance Ministry, while briefing the National Assembly standing committee on Finance and Revenue, which met with Naveed Qamar in the chair.
Independent experts briefed the Committee on Pakistan’s Public Debt, outlining its current dynamics, underlying challenges, and the need for coordinated fiscal and monetary reforms. The experts provided an in-depth analysis of debt sustainability, repayment obligations, and the structural issues contributing to the growing debt burden.
Govt debt falls by Rs430bn in Jul-Aug
Experts highlighted that Pakistan’s GDP was not increasing at the pace, and debt was increasing, resulting in serious challenges. They presented a policy paper before the committee and warned that the country’s public debt has become a central economic risk, growing much faster than the economy itself and squeezing space for growth and development spending.
According to the paper, “Pakistan’s Public Debt: Dynamics, Challenges, and the Case for Coordinated Reforms,” total public debt has ballooned to around Rs 80.5 trillion by the end of June 2025 — nearly four times higher than domestic debt and over a fourfold increase in external debt over the past decade. Interest payments now consume around 89 percent of federal government net revenues, and little remains for infrastructure or social protection.
The study cautions that the debt ratio will keep rising unless Pakistan achieves faster GDP growth, lowers borrowing costs, and runs a primary fiscal surplus. It identifies three core weaknesses driving the crisis: poor forecasting, fiscal dominance over monetary policy, and risky external borrowing patterns.
It warns of a “vicious cycle of fiscal dominance”, where massive government borrowing has crowded banks into financing budget deficits while discouraging private credit. “This cycle weakens monetary transmission, hands windfall gains to banks, and perpetuates inflationary pressures,” the paper notes.
Experts called for urgent reforms to build integrated forecasting systems for interest rates and yield curves within the Ministry of Finance; break the fiscal-monetary cycle by broadening non-bank financing and ending arbitrage between banks and the State Bank; and shift external borrowing toward concessional, long-term financing while boosting exports and foreign investment.
The paper stresses that if interest rates remain stable and GDP grows around 5 percent annually, the debt-to-GDP ratio could gradually decline below 60 percent by fiscal year 2035. But that will require strict coordination between the Ministry of Finance, State Bank of Pakistan, and Parliament, backed by credible fiscal discipline and transparent debt management.
The report exposes a “vicious cycle of fiscal dominance and monetary accommodation,” where massive government borrowing has crowded out private credit, pressured the central bank to inject liquidity, and handed “windfall gains to banks” through risk-free arbitrage between low-cost borrowing from the State Bank and high-yield government securities.
“This cycle weakens monetary transmission, keeps government yields elevated, and perpetuates high inflationary pressures,” it cautions.
The authors urge authorities to broaden non-bank financing, lengthen maturities, and remove arbitrage by narrowing interest rate corridors — steps that could restore market discipline and reduce rollover risks.
Pakistan’s debt crisis, the report highlights, is aggravated by the absence of a robust forecasting system for interest rates, yield curves and exchange rates. Without such tools, fiscal authorities rely on “judgmental or flat assumptions,” resulting in mispriced risks and ad-hoc borrowing decisions. The report’s stark message: Pakistan’s debt challenge is not just economic — it is institutional. Without coordinated reforms and credible fiscal discipline, the debt spiral will continue to choke growth and undermine financial sovereignty.
The committee took a keen interest in the discussion and raised a number of pertinent questions regarding debt management strategies, external borrowing, the role of international financial institutions, and possible policy measures to ensure long-term fiscal stability.
The committee appreciated the valuable insights shared by the experts and emphasized the importance of adopting a coordinated and transparent reform framework to address Pakistan’s public debt challenges effectively.
Copyright Business Recorder, 2025
Comments
Comments are closed for this article.