Pakistan’s public and guaranteed debt has reached a staggering Rs74.6 trillion by the end of June 2024, as revealed in the latest report by the Finance Ministry.
The Debt Sustainability Analysis report for 2025-27 warns that the country’s debt could escalate to unsustainable levels if exposed to new macroeconomic and fiscal shocks.
The report underscores that although Pakistan’s debt profile remains sustainable over the medium term, it is fraught with significant risks.
The high proportion of external and floating-rate domestic debt makes the economy vulnerable to external shocks and structural weaknesses.
The report also highlights that Pakistan’s public and publicly guaranteed debt rose by Rs8.2 trillion in the last fiscal year, a 12.3% increase, pushing the debt-to-GDP ratio to 70.5%, well above the 57.5% limit set by the Debt Limitation Act.
This breach of statutory limits indicates that the debt burden is unsustainable, despite the International Monetary Fund (IMF) considering it sustainable to prevent immediate restructuring.
The finance ministry’s report further outlines that the increase in public debt primarily stems from the financing of the federal fiscal deficit, with interest expenses being a substantial contributor.
The analysis suggests that in the baseline scenario, the debt-to-GDP ratio is expected to decline from FY2025 to FY2027, with a projected decrease from 68.5% to 66.4%.
However, this optimistic outlook is contingent on avoiding fiscal and macroeconomic shocks, which could push the ratio above 70%, endangering debt sustainability.
In a combined macro-fiscal shock scenario, the debt-to-GDP ratio could surpass 70%, potentially reaching 75%, which is 8.6% higher than the baseline projection.
This would increase the government’s total financing requirements to around 22.6% of GDP, significantly above the manageable 15% threshold for developing economies like Pakistan.
The report further warns that adverse factors such as lower-than-expected economic growth, a rise in the primary deficit, higher real interest rates, increased contingent liabilities, and exchange rate depreciation could severely exacerbate public debt and gross financing needs in the medium term.
Additionally, the report highlights that Pakistan’s external debt, largely sourced from concessional bilateral and multilateral agreements, carries a growing share of short-term obligations, which heightens refinancing risks and amplifies gross financing needs.
Fixed-rate debt constitutes 63% of the external debt, while 37% is floating-rate, making the country susceptible to interest rate fluctuations.
Within domestic debt, a significant share of floating-rate debt (74%) poses a critical interest rate risk, despite its long-term maturity structure.
