Khurram Shahzad
For years, Pakistan’s public finances seemed trapped in a punishing cycle borrow to survive, pay ruinous interest, borrow again. Now, by several significant measures, that cycle appears to be breaking.
Pakistan’s central government debt grew at just 5 percent in the current fiscal year, the slowest pace recorded in at least 15 years and a sharp retreat from the 23 percent growth posted as recently as fiscal year 2023, according to data from the State Bank of Pakistan. Officials say the deceleration reflects a deliberate and sustained effort to restructure how the country borrows and at what cost.
The numbers, scrutinized by economists and international creditors alike, suggest a country that has spent the better part of three years rewiring its fiscal architecture from the ground up. At the center of the debate is a figure that has circulated widely on Pakistani social media that claims that the country’s debt has ballooned to between 97 and 100 trillion rupees. Officials push back sharply on that characterization.That figure, they say, conflates central government debt, currently sitting at approximately 81.9 trillion rupees, with a broader accounting category that includes private sector liabilities. The distinction matters enormously. Sovereign debt sustainability is not assessed by headlines or aggregate totals but by how much a country owes relative to the size of its economy.
On that measure, Pakistan is moving in the right direction. The debt-to-GDP ratio has declined from roughly 76 percent in fiscal year 2019-20 to approximately 68 percent in fiscal year 2026. More notably, external debt, the portion denominated in foreign currencies and most susceptible to exchange rate shocks, has fallen from around 28 percent of GDP to roughly 21 percent over the same period.
The government has also restructured the terms on which it borrows. Average domestic debt maturity has extended from 2.8 years to 3.8 years, a change that buys breathing room by spreading repayment obligations further into the future and reducing what economists call refinancing risk, the danger of being caught unable to roll over short term debt in a hostile market.
Pakistan also recently issued a foreign bond at what officials described as the lowest rate in the country’s history at 2.5 percent, a development that signals renewed if cautious confidence among international investors.
Separately, the government has retired 4.7 trillion rupees in expensive existing debt, including 2.47 trillion rupees owed to the central bank and 2.3 trillion rupees of market debt bought back before maturity. Officials say early debt retirement at this scale is without precedent in Pakistan’s history.
Perhaps the most consequential shift for ordinary Pakistanis is the change in how much of the federal budget is consumed by interest payments alone.
At their peak in fiscal year 2023, those payments absorbed roughly 64 cents of every rupee of gross federal revenue, leaving almost nothing for roads, schools, hospitals or public services. That ratio has since fallen to approximately 40 percent, freeing up fiscal space that analysts say the government is beginning to deploy toward development spending.
In absolute terms, interest expense has declined from approximately 8.89 trillion rupees to an estimated 6.94 trillion rupees in the current fiscal year, a reduction of nearly two trillion rupees or about 22 percent in a single year. Beyond the debt numbers, Pakistan’s external position has undergone a notable reversal. Foreign exchange reserves once covered less than two weeks of imports, a level that left the country acutely vulnerable to external shocks and import disruptions. Reserve cover has since risen to nearly three months and officials emphasize that a growing share of the accumulation has come from non debt sources, improving what economists call the quality of reserves.
The current account has also swung from chronic deficit to surplus. In fiscal year 2022, Pakistan recorded a current account deficit of 17.4 billion dollars, the second largest in its history. The country has now posted two consecutive years of current account surpluses, a turnaround that substantially reduces its dependence on external financing.
Three consecutive years of primary fiscal surpluses, meaning the government is now collecting more revenue than it spends before accounting for interest payments, have further slowed the pace at which new debt is being added.
What has changed, supporters of the current trajectory argue, is the direction of travel and the momentum behind it.
_”Every government borrows. Every government repays,”_ one official framing of the data put it. The real question is whether debt is becoming more sustainable, more affordable and less risky.
By the metrics Pakistan is now posting, the answer, at least for this fiscal year, appears to be yes.
The writer is Advisor to the Finance Minister, vide X Account Post_
