Pakistan's public debt remained above the sustainable level in the last fiscal year, violating an Act of Parliament due to higher interest expenses, which also neutralised the benefits of exchange rate stability and reductions in other expenditures, states a new government report.
The Debt Policy Statement 2025 from the Ministry of Finance officially confirmed that the government could not bring down the debt level to 56.75% of the size of the economy by the end of the last fiscal year. The limit had been set for the fiscal year 2023-24 under the Fiscal Responsibility and Debt Limitation Act. For this fiscal year, the ceiling will be further tightened to 56%.
The Debt Policy Statement has been finalised on the heels of a World Bank Debt Heat Map report, which also flagged a lack of transparency in reporting Pakistan's debt indicators.
The World Bank report showed that the government did not timely publish the Annual Debt Bulletin for the last fiscal year and also published the Annual Borrowing Plan with a lag of over two months. The World Bank report also mentioned that the government provided no information about public-private partnership-related guarantees.
When contacted, Qumar Abbasi, the spokesperson for the finance ministry, said that there was only a couple of weeks' delay in uploading the debt-related reports on the ministry's website. He stated that the delay was caused by human resource-related reshuffling in the debt office.
On the question of difficulties in debt data integration among various government stakeholders, the spokesman said that the exercise was still ongoing. He added that officials from the central bank, the finance ministry, and the economic affairs ministry had undertaken the exercise to integrate the data.
The Debt Policy Statement evaluates the federal government's debt policies against the principles of sound fiscal and debt management and the debt reduction path.
According to the Fiscal Responsibility and Debt Limitation Act of 2005, public debt should not have exceeded 56.75% of the Gross Domestic Product for the fiscal year 2023-24. The official report stated that total public debt was equal to 67.5% of GDP during the last fiscal year. The report noted that the federal primary deficit has been on the decline, as a surplus was generated during the last fiscal year.
However, interest costs continued to increase, primarily due to the high-interest rate environment, as the SBP policy rate reached a high of 22% during the fiscal year 2024. The government spent Rs8.2 trillion on interest payments alone in the last fiscal year, which was Rs2.5 trillion or 43% higher than the corresponding period of the previous fiscal year.
Successive governments have been violating the FRDL Act, which has also been amended multiple times to relax debt-related ceilings.
During the last fiscal year, total public debt increased by 13% to Rs71.2 trillion, of which domestic debt stood at Rs47.2 trillion and external debt at Rs24.1 trillion. In terms of the debt-to-GDP ratio, total public debt showed a decrease of 7%, standing at 67.5% in June 2024. The reduction was due to inflation-driven growth in the size of the economy.
However, total domestic debt increased by Rs8.4 trillion, accounting for 66% of the total public debt.
The stock of external debt also witnessed a net increase of 3%, while the share of external debt in total public debt decreased from 38% to 34% by June 2024. A key reason behind the reduction in the share of external debt was Pakistan's poor credit ratings, which closed some borrowing avenues, including access to capital markets and foreign commercial banks.
The report stated that external debt exposure remains within the maximum limit of 40% as envisaged in the debt management strategy but remains sensitive to exchange rate movements.
The report also indicated mixed performance in the implementation of the Debt Management Strategy.
The Average Time to Maturity (ATM) of domestic government debt was 2 years, 8 months as of June 2024, the same as the preceding year, and could not be extended despite the issuance of long-term debt instruments.
During the past fiscal year, the share of permanent debt in total domestic debt increased to 70% in 2024. This was due to significant issuance of Pakistan Investment Bonds, with the stock rising from Rs22 trillion to Rs28 trillion by June last year.
The 2 years, 8 months maturity period indicates that the debt remains risky and will keep the country dependent on commercial banks exploiting the situation.
The average maturity period of external debt decreased to 6 years, 2 months from 6 years, 4 months, as the government's reliance on shorter-tenor debt increased. The government also failed to secure significant external concessional financing and was unable to float new sovereign bonds.
The report stated that accessing international markets depends on favourable interest rate conditions along with other economic factors.
The finance ministry stated that the government will explore alternative funding sources, including the issuance of Green Sukuk, asset-light structures, green, social, sustainability-linked bonds, and Panda bonds. The government has been attempting to issue Panda bonds in Chinese markets, but so far, without success.
Other emerging funding sources, such as debt swapsespecially debt-for-nature swaps and debt-for-climate swapsare also under consideration, it added.
Furthermore, a buyback and exchange policy will be pursued by conducting similar operations based on favourable secondary market yields and investor appetite for long-term instruments, signalling a continued commitment to proactive debt management strategies.
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