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As of June 2024, Pakistan’s public and publicly guaranteed debt has soared to an unprecedented Rs74.6 trillion. This dramatic increase of Rs8.2 trillion, or 12.3%, from the previous fiscal year has pushed the debt-to-GDP ratio to a concerning 70.5%. This figure significantly surpasses the statutory limit of 57.5% set by the Debt Limitation Act, signaling potential trouble for the nation’s economic stability.
Understanding the Debt Dynamics
Debt Profile and Risks:
According to the Finance Ministry’s Debt Sustainability Analysis report for 2025-27, Pakistan’s debt profile presents a mixed picture. While the debt is deemed manageable over the medium term, the high levels of external debt and floating-rate domestic debt expose the country to significant risks. These risks include potential external shocks and structural vulnerabilities that could jeopardize debt sustainability.
In the report’s baseline scenario, the debt-to-GDP ratio is expected to gradually decrease from 68.5% in FY2025 to 66.4% in FY2027. However, this optimistic projection is contingent on maintaining stable economic conditions. Should a combination of fiscal and macroeconomic shocks occur, the ratio could rise above 70%, potentially reaching as high as 75%. Such an increase would challenge the country’s ability to manage its debt effectively.
Rising Financing Requirements:
The report highlights that adverse economic conditions could drive total financing requirements to approximately 22.6% of GDP—3.2% higher than the baseline assumption. For developing nations like Pakistan, financing needs exceeding 15% of GDP are considered problematic. If a macro-fiscal shock occurs, the debt-to-GDP ratio could surpass 70%, pushing it into unsustainable territory. This scenario underscores the importance of addressing financing challenges proactively.
Debt Composition and Risks:
Pakistan’s external debt primarily comes from concessional bilateral and multilateral sources. Of this debt, 63% is fixed-rate, while 37% is floating-rate. Although the maturity structure of external debt is favorable, the rising share of short-term debt poses refinancing risks.
On the domestic front, debt constitutes 66.2% of the total public debt. A significant portion—74%—is floating-rate, which makes it vulnerable to interest rate fluctuations. Fixed-rate debt makes up 26% of domestic obligations. The high proportion of floating-rate debt heightens the risk of adverse impacts from rising nominal interest rates.
Economic Assumptions and Projections:
In the baseline scenario, the Finance Ministry anticipates an economic growth rate of 3.6% in FY2025, with inflation averaging 12% before declining to single digits in the following years. The exchange rate is projected to remain stable, supported by a favorable current account balance. Additionally, improvements in the federal primary balance are expected during FY2025-27.
However, if economic growth falls to 2.6% or if there is a significant increase in the primary deficit, the debt-to-GDP ratio could exceed 70%, reaching 70.6% by FY2027. This would result in a persistently high ratio over the medium term. The substantial share of floating-rate debt further complicates matters, as rising nominal interest rates could adversely affect the debt-to-GDP ratio.
External Debt and Exchange Rate Risks:
Pakistan’s external debt poses additional risks, particularly due to exchange rate depreciation. While the country has the capacity to meet its external debt obligations, challenges such as inadequate export receipts, rising import costs, and a deteriorating current account balance could exert pressure on the exchange rate, complicating debt management.
Looking Ahead
The Finance Ministry’s report underscores the urgent need for comprehensive fiscal and economic strategies to address Pakistan’s rising debt burden. Managing risks from external shocks, interest rate fluctuations, and economic downturns will be crucial for maintaining debt sustainability and ensuring long-term economic stability.
As Pakistan navigates these challenges, it is vital for policymakers to implement effective measures to stabilize the economy, reduce debt levels, and foster sustainable growth. The path forward will require a concerted effort to balance fiscal responsibility with economic development to secure a stable financial future for the country.
