KEY POINTS
- Debt growth moderates to 13% after years of sharp increases
- Exchange rate stability reduces external debt vulnerability
- Investor confidence improves with Eurobond yields down sharply
- Fiscal deficit narrows as savings cut interest burden
ISLAMABAD: Pakistan’s central government debt rose to PKR 80 trillion by June 2025, but official data suggests the pace of accumulation has slowed markedly compared to the surge of recent years.
Figures shared by the Ministry of Finance show that while the debt stock expanded by PKR 31 trillion between FY22 and FY25, the annual growth rate has been contained to 13% over the past two years, down from highs of 23% and 28% earlier in the decade.
Officials at the Ministry of Finance attributed the moderation to stronger fiscal discipline. They pointed out that FY25 saw the country record a historic primary surplus alongside the first-ever early repayments of PKR 2.6 trillion in just eleven months.
“This is a demonstration of improved fiscal resilience,” a senior official told the press, framing the development as a departure from the pattern of uncontrolled borrowing.
Exchange rate shield
A large portion of the earlier surge in debt—about PKR 10 trillion in FY22 and FY23—was traced to exchange rate devaluation. The Ministry officials argued this stemmed from what they described as “fiscal landmines” inherited from the previous administration, citing mismanaged exchange rate policies and petroleum price freezes.
By FY25, the external debt share of the total portfolio had fallen to 32%, down from 38% three years earlier, reducing exposure to currency fluctuations. In dollar terms, the net increase in external debt over the past three and a half years has been just $2.9 billion.
This stability has been underpinned by current account surpluses, record-high remittances of $38 billion, and a steadier Pakistani rupee.
Investor confidence restored
Market sentiment has also improved. Pakistan’s Eurobond yields, which at one point soared to 60% in distressed trading, are now reported between 6% and 9%.
Excluding the long-dated 2051 bond, the yields hover between 6% and 8%, the levels officials say reflect revived international investor confidence.
Debt sustainability in focus
The Ministry noted that the Debt-to-GDP ratio has eased to around 70% in FY25, down from 77% in FY20. Analysts describe this as a meaningful signal of debt sustainability, provided fiscal consolidation continues.
Deficit management and savings
On the fiscal side, interest expenses fell by PKR 850 billion in FY25, a saving described by officials as “historic.” This helped close the federal fiscal deficit at PKR 7.1 trillion, below the budgeted PKR 8.5 trillion. The deficit is projected to shrink further to PKR 6.5 trillion in FY26.
Outlook
Looking ahead, officials term international credit rating agencies’ upgrades a reflection of Pakistan’s improved debt profile and fiscal outlook. With a stable currency, improving current account, and tighter fiscal management, they forecast debt growth will remain limited in FY26.
The Ministry argues the country is now positioned to consolidate its gains, with policy continuity seen as key to sustaining the momentum.
