ISLAMABAD: The Finance Division has said that Pakistan’s public debt burden is projected to decline over the next three years, but the country remains exposed to major economic and financial risks, including slow growth, rupee depreciation, and high interest rates.
In its report “Debt Sustainability Analysis fiscal year 2026-2028”, the Division noted that the public and publicly guaranteed (PPG) debt-to-GDP ratio in a combined macro-fiscal shock scenario will surpass the 70 percent threshold, thereby risking debt sustainability.
In this scenario, the debt-to-GDP ratio increases from 69.6 percent in fiscal year 2026 in the baseline to 75.3 percent in fiscal year 2028. Factors such as lower-than-expected economic growth, a deterioration in the federal primary balance, an increase in interest rates, and exchange rate depreciation could significantly raise public debt and GFN (both as ratios of GDP) over the medium term.
Once again, public debt limit breached
It highlights the need for a prudent and coordinated policy mix, such as tightening non-priority expenditures, enhancing domestic revenue mobilization, and extending debt maturities, to manage debt effectively in the event of simultaneous macro-fiscal shocks.
The public debt is vulnerable to an increase in contingent liabilities, as the PPG debt-to-GDP ratio remains above the benchmark, which risks debt sustainability. The PPG debt-to-GDP ratio in this scenario elevates to 72.4 percent in fiscal year 2028. A reduction in primary balance due to an increase in non-interest expenditure has a detrimental impact on the public debt.
GFN also increases by 2.6 percentage points of GDP over the medium term. This underscores how hidden fiscal risks, when realized, can significantly amplify debt vulnerabilities and complicate the medium-term fiscal outlook.
As of the end of June 2025, Pakistan’s public debt was recorded at Rs. 80.52 trillion (70.8 percent of the GDP), reflecting an increase from Rs. 71.24 trillion in June 2024 (67.7 percent of the GDP).
Domestic debt constituted the major share and showed a relatively higher rise, whereas external debt remained broadly stable in USD terms. This shift reflects the government’s policy to rely more on domestic sources, thereby reducing exposure to exchange rate volatility and external refinancing risks.
Publicly guaranteed debt stood at Rs. 4.27 trillion, up from Rs. 3.38 trillion a year earlier. Overall, public and publicly guaranteed debt reached Rs. 84.79 trillion (74.5 percent of GDP), compared to Rs. 74.62 trillion (70.9 percent of the GDP) in June 2024.
The Debt Sustainability Analysis demonstrates that the baseline public and publicly guaranteed debt-to-GDP ratio remains within the prudent threshold range of 50-70 percent of GDP for emerging economies like Pakistan. However, debt sustainability is susceptible to risks embedded in the macroeconomic and fiscal frameworks, as revealed by shock scenarios.
Potential adverse shifts in the federal primary balance, exchange rate, interest rates, growth trajectory, or realization of contingent liabilities could drive the debt-to-GDP ratio and gross financing needs above benchmark levels after the system absorbs these shocks. Pakistan’s external debt constitutes 32.3 percent of the total public debt as of the end of June 2025 and is mainly sourced from concessional bilateral and multilateral creditors.
The maturity structure is expected to be maintained above 6 years over the medium term. However, the share of short-term debt (24 percent of total external debt as of the end of June 2025) poses a risk of refinancing. Similarly, a large portion of floating external debt (41 percent of total external debt as of end June 2025) presents a moderate refinancing risk to GFN.
Moreover, the external debt is within the IMF’s benchmark and portrays moderate currency risk; however, it may risk debt sustainability if the current account deficit is higher than expected and foreign exchange reserves decline. As of the end of June 2025, domestic debt accounted for 67.7 percent of total public debt, with a significant portion comprising long-term instruments.
However, the composition of this debt remains skewed (80 percent held in floating-rate debt), exposing the domestic debt profile to elevated interest rate risk. Nevertheless, shocks to economic growth, climate change risks, external disturbances, shifts in the primary balance, and the materialization of contingent liabilities can significantly influence debt dynamics, thereby posing risks to debt sustainability over the medium.
Total public debt stands at 70.8 percent of GDP by the end of June 2025, which is expected to decline to 60.8 percent by fiscal year 2028. Moreover, guarantees are 3.8 percent of GDP by the end of June 2025, which would decline to 2.5 percent by fiscal year 2028. As such, the public and publicly guaranteed (PPG) debt is expected to remain sustainable over the medium term (fiscal year 2026-2028).
The decrease in public debt would be mainly driven by prudent economic management and fiscal consolidation.
In the baseline fiscal projections, the primary balance remains more than 1 percent of GDP over the medium-term due to fiscal consolidation measures and stable economic growth. However, due to limited fiscal space, a sudden shift in the primary balance cannot be ignored.
The analysis shows that a 50 percent cut in the planned primary balance would increase the PPG debt-to-GDP ratio to 65.1 percent in FY2028 from 63.3 percent in the baseline. As such, it would remain sustainable over the medium term 3. The same applies to the GFN to GDP ratio, increasing from 15.6 percent of GDP in the baseline to 16.7 percent in fiscal year 2028.
Conversely, assuming a shock in the primary balance that results in a primary deficit near the historical average (i.e., a primary deficit of 1.4 percent of GDP), the PPG debt-to-GDP ratio would slightly surpass the benchmark, reaching 70.1 percent in FY2028, risking debt sustainability. This sensitivity illustrates how even modest fiscal slippages can erode the sustainability margin, reinforcing the importance of consistent consolidation efforts and proactive fiscal management.
Any adverse event that leads to a decline in economic growth significantly increases the PPG debt-to-GDP ratio. The stress-test analysis identifies those adverse events that slow down economic growth and raise debt stress. In response to a 1 standard deviation shock to economic growth for two consecutive years starting from fiscal year 2026, the PPG debt-to-GDP ratio will surpass the benchmark to reach 71.1 percent in fiscal year 2028.
As such, lower growth in GDP, through its implications on revenue and subsequently on the fiscal deficit, put pressure on higher debt accumulation.
This highlights the centrality of growth in preserving debt sustainability, as weaker output not only raises debt ratios mechanically but also undermines fiscal consolidation efforts. Consequently, the GDP growth shock adversely affects debt dynamics and jeopardizes debt sustainability over the medium term.
Real interest rate risks are moderate. The large share of floating-rate debt within domestic debt (around 80 percent at the end of June 2025) makes domestic debt vulnerable to a nominal interest rate shock. Particularly, this shock increases the risk of increasing interest payments in the near term, leading to a debt burden.
Furthermore, with low foreign exchange reserves and scarce market financing, the nominal interest rate adversely impacts the debt-to-GDP ratio. This indicates that Pakistan’s debt profile is highly sensitive to interest rate movements, underscoring the importance of pursuing an optimal policy mix to contain risks.
However, in this scenario, the negative differential between the real interest rate and real GDP growth helps in moderating nominal interest rate impacts on the debt-to-GDP ratio and GFN. The debt-to-GDP ratio is expected to reach 64.7 percent in fiscal year 2028 compared to 63.3 percent in the same period in the baseline scenario.
The high share of external debt poses risks to debt sustainability through exchange rate depreciation. Although Pakistan’s capacity to service its external debt obligations remains adequate, it is subject to risks emanating from inadequate export receipts and a rise in imports, which widen the current account deficit and exert pressure on the exchange rate.
Stress analysis indicates that exchange rate depreciation has the potential to widen the financing gap, thereby increasing the debt-to-GDP ratio to 64.1 percent in fiscal year 2028 compared to 63.3 percent in the baseline. This highlights the structural vulnerability of debt dynamics to external sector imbalances, where even moderate exchange rate shocks can quickly translate into higher debt ratios, the report noted.
Copyright Business Recorder, 2025
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