Debt surges to record Rs80.5tr
Public debt has jumped to a new record of Rs80.5 trillion by the end of June – an addition of Rs25.4 billion per day, breaching an Act of Parliament and further weakening the government's debt-bearing capacity, revealed official statistics.
The State Bank of Pakistan (SBP) has released the debt bulletin for fiscal year 2024-25 which showed that public debt increased both in absolute terms and relative to the size of the economy, a deadly combination that underscores the highly unsustainable indebtedness of the country.
As of the end of June, gross public debt increased to Rs80.5 trillion, Rs9.3 trillion or 13% higher than the burden in the preceding fiscal year, according to the central bank's debt bulletin. On average, the government added Rs25.4 billion every day during FY25. The report stated that in terms of the size of the economy, gross public debt rose from 67.8% of GDP to 70.2%. Under the Fiscal Responsibility and Debt Limitation Act, the government is bound to reduce debt by 0.5 to 0.75% of GDP every year until it reaches 50% by 2032-33. However, the coalition government has violated the law.
The high indebtedness has left little space for spending on productive sectors of the economy, with almost half of the budget consumed by interest payments. Despite this, there remains a strong desire in official circles to spend more on mega projects, particularly those carrying political advantages due to pressure from coalition partners.
Inclusive all, Pakistan's total debt and liabilities rose to Rs94.2 trillion by the end of June, equal to 82.1% of GDP, according to the central bank.
The rising debt burden in absolute and GDP terms also reflects poorly on the International Monetary Fund (IMF), which has been unable to ensure sustainable fiscal discipline. This higher-than-statutory debt limit indicates that Pakistan's debt burden is unsustainable. However, the IMF continues to declare it sustainable to avoid the need for immediate domestic and foreign debt restructuring. The significant increase in public debt was primarily due to financing the federal fiscal deficit, with interest expenses being a major component. As a result, Pakistan's financing requirements remain at unsustainable levels, ranging between 20% to 23% of GDP. For a developing country like Pakistan, financing needs of 15% of GDP are considered manageable.
The central bank report showed that the government's domestic debt jumped from Rs47.2 trillion to Rs54.5 trillion in one fiscal year, an increase of Rs7.3 trillion or 15.5%. Pakistan's domestic debt grew three times faster than the economy and inflation. The government's external debt rose from Rs21.8 trillion to Rs23.4 trillion – a jump of Rs1.7 trillion – despite the local currency remaining largely stable.
Pakistan's external debt is mostly obtained from concessional bilateral and multilateral sources. However, the growing share of short-term debt in recent years poses risks to debt sustainability due to high refinancing risks, further increasing gross financing needs. Within the external debt portfolio, fixed-rate debt accounts for about two-thirds of total external debt.
Pakistan's fiscal position always remains vulnerable to shocks, with the country currently facing one of the worst floods in its history that will have implications on both the primary balance and public debt.
A finance ministry report stated that due to limited fiscal space, a sudden shift in the primary balance could not be ruled out. If a shock pushes the primary deficit close to historical levels, the debt-to-GDP ratio will exceed the 70% benchmark, further risking debt sustainability, according to the debt office report of August last year.
The central bank report further noted that debt from the IMF increased by 13% to Rs2.63 trillion by June this year. Pakistan is currently availing a $7 billion IMF bailout package – the 25th programme – aimed at ensuring fiscal and external stability.
High indebtedness has resulted in soaring debt servicing costs. The SBP said the country spent Rs13.2 trillion on repayment of maturing loans and interest costs in the last fiscal year, an increase of 10% or Rs1.2 trillion compared to the previous year. Interest payments alone consumed Rs9.5 trillion in the last fiscal year. Pakistan also paid Rs162 billion, or $570 million, in interest to the IMF during FY25.
Overall, in dollar terms, Pakistan's external debt and liabilities increased to $135 billion by June, with an addition of $4 billion in one fiscal year. Compared to previous years, the pace of external debt growth was slower due to the central bank's decision to buy over $8 billion from the local market.