Lower interest payments shrink Pakistan’s budget outlay

KARACHI: In a major fiscal relief, the federal government has projected a sharp 16 percent or Rs 1.57 trillion decline in its interest payment obligations for the next fiscal year (FY26), driven by a significant reduction in policy rates.

This drop has also contributed to a contraction in the overall federal budget outlay, which shrank from Rs 18.877 trillion of FY25 to Rs 17.573 trillion for the next fiscal year.

As the policy rate has reduced significantly 11 percent during the last one year, the government has reduced its estimates for the next fiscal year.

According to budget document for the next fiscal year (FY26), the federal government has estimated total interest payments amounted to Rs 8.207 trillion for the next fiscal year down from Rs 9.775 trillion estimated for this fiscal year (FY25), showing a sharp decline of 16 percent Rs 1.568 trillion.

Domestically, Pakistan’s economy has displayed consistent signs of stabilization and recovery during the last two years i.e. FY24 and FY25, driven by proactive governmental interventions and sound macroeconomic management.

Inflation has significantly decelerated, foreign exchange reserves have strengthened, and the exchange rate has stabilized. In response, the State Bank of Pakistan (SBP) initiated a measured easing cycle beginning in June 2024, cumulatively reducing the policy rate by 50 percent or 1100 basis points from 22 percent to 11 percent as of May 2025.

According to budget documents, the estimated interest payment for the next fiscal year is also Rs 738 billion lower than the revised estimates of the Rs 8.459 trillion. The major decline has estimated in the domestic interest payments, which are estimated Rs 7.197 trillion for FY26 compared to Rs 8.376 trillion projected in FY25, depicting a decline of Rs 1.542 trillion. As per revised estimates, domestic interest payments for this fiscal year will be Rs 7.907 trillion.

External interest payments declined slightly Rs 29.3 billion to Rs 1.009 trillion for FY26 as against Rs 1.039 trillion for this fiscal year.

It may be mentioned here that the less than target revenue collection compelled the government to borrow from the domestic banking system to finance the fiscal deficit and the federal government is major borrower of the banking sector.

Copyright Business Recorder, 2025