Debt, liabilities grow at double-digit pace
Pakistan's debt and liabilities surged to a record of nearly Rs85 trillion in fiscal year 2023-24, growing at a double-digit pace, amid the country's inability to pay back maturing bilateral debt that is rapidly increasing interest cost.
The State Bank of Pakistan (SBP) reported on Thursday that the country's debt and liabilities rose Rs8.4 trillion, or 11%, by the end of June 2024 compared to the previous year. As a result, the total debt and liabilities peaked at Rs85 trillion, of which liabilities were Rs4.6 trillion.
In terms of the size of economy, the debt and liabilities-to-GDP ratio contracted from 91% to 80.1% by the end of June. The reduction came mainly because of inflation-driven expansion of the economy.
The Fiscal Responsibility and Debt Limitation Act requires the government to keep its debt below 57% by June this year. For a developing country like Pakistan, a 50% debt-to-GDP ratio is considered sustainable. Pakistan's debt sustainability problems have become acute as it is unable to meet the contractual obligation of paying back the bilateral debt owed to China, Saudi Arabia and the UAE.
SBP Governor Jameel Ahmad said last week that out of the $26.4 billion worth of debt maturing in the current fiscal year, the government would be seeking rollover of $16.4 billion. Because of the strategy to defer some major financial obligations, the central bank data showed that there was 30% less external debt repayment but the interest on external debt jumped nearly one-fourth.
External debt servicing decreased from $20.8 billion to $16.9 billion in the last fiscal year. There was a reduction of nearly $5 billion in principal payments but interest costs increased $1.1 billion to $5.5 billion. According to the Ministry of Finance's Debt Sustainability Analysis for 2025-27, due to the high debt level and the consequent gross financing requirement, Pakistan remains exposed to debt sustainability-related risks.
"Debt profile is sustainable over the medium term, however, it faces significant risks from external shocks and structural vulnerabilities, particularly due to a high proportion of external and floating-rate domestic debt," said the report. The large share of floating-rate debt makes domestic debt vulnerable to nominal interest rate shocks. With low foreign exchange reserves and scarce market financing, nominal interest rates could adversely impact debt-to-GDP ratios, according to the finance ministry.
The cost of debt servicing cannot be diminished until the central bank reduces its policy rate and the government negotiates with commercial banks for a reduction.
Gross public debt, which is the direct responsibility of the finance ministry, totaled Rs71.2 trillion by the end of June, as per SBP data.
Pakistan's debt burden will persist until significant reforms are initiated, including the review of provincial projects, winding up the ministries operating in areas now under provincial control and addressing defence and debt expenses.
Public sector enterprises' (PSEs) debt and liabilities reached Rs2.5 trillion by the end of June, surging 8% and reflecting uncontrolled losses of those enterprises. No government has taken steps to reform state-owned companies.
Average exchange rate at the end of June last year was Rs286.4, which appreciated 2.7% to Rs278.4 to a dollar within one year.
External debt remained stable at Rs33 trillion due to the strengthened rupee, Pakistan's inability to raise new debt from foreign commercial banks and capital markets, and purchase of over $6 billion from the domestic market.
In dollar terms, Pakistan's external debt and liabilities climbed to $130.5 billion by the end of June, an increase of $4.4 billion in the last fiscal year. The increase was primarily because of IMF lending and new cash deposits of $3 billion from Saudi Arabia and the UAE in July last year.
The IMF debt grew 14.3% to Rs2.3 trillion by the end of June.