Focus on Debt-to-GDP, Risk Reduction, and Interest Savings Guides Pakistan’s Debt Management
ISLAMABAD: In line with its commitment to sound fiscal management, the Ministry of Finance continues to center its debt management strategy on aligning public debt-to-GDP ratio to Fiscal Responsibility and Debt Limitation Act, minimizing refinancing and rollover risks while generating interest savings to support sustainable public finances.
In a statement released on Tuesday the Ministry of Finance while noting recent commentary about public debt levels reiterates that absolute numbers, which will naturally rise with inflation, are not meaningful indicators of sustainability in isolation. The appropriate measure of sustainability is looking at debt relative to the size of the economy i.e., Debt-to-GDP – not absolute rupee amounts. By this yardstick, which is followed globally, Pakistan’s position has actually improved over the last few years, with Debt-to-GDP ratio declining from 74% in FY22 to 70% in FY25. At the same time, the government has reduced rollover and refinancing risks and saved taxpayers substantial interest costs.
The Ministry of Finance has also highlighted the government’s focus on early repayments and risk reduction whereby for the first time in Pakistan’s debt history, the government prepaid Rs 2,600 billion before maturity across commercial and central bank obligations – reducing rollover and refinancing risks and generating hundreds of billions of rupees in interest savings.
Similarly, on the fiscal side, the federal fiscal deficit stood at Rs 7.1 trillion in FY25, lower than Rs 7.7 trillion in FY24. As a share of GDP, the fiscal deficit fell to 6.2% (consolidated deficit: 5.4%) in FY25, from 7.3% (consolidated deficit: 6.8%) in FY24, with Pakistan posting a historic Primary Surplus of 2.4% of GDP, or Rs 2.7 trillion, for the second consecutive year. Consequently, total debt stock rose 13% year-on-year, below the 17% average growth of the past five years.
To lower interest burden, prudent liability management along with reduction in interest rate in FY25 delivered over Rs 850 billion in interest expense savings compared to the budgeted amount. In the current fiscal year’s budget, interest allocation is Rs 8.2 trillion, down from Rs 9.8 trillion in FY25.
Early retirement of debt has led to strengthening of debt maturity profile, thereby reducing refinancing and rollover risks while improving sovereign debt resilience. In this regard, public-debt average time to maturity has improved to about 4.5 years in FY 25 compared to about 4.0 years last year; within this, domestic debt average time to maturity has also risen to over 3.8 years from about 2.7 years.
The consequential effect of the prudent fiscal management has resulted in a positive impact on the external side, where current account position recorded a USD 2.0 billion current account surplus in FY25 – the first in 14 years – reducing gross external financing needs.
Part of the increase in external debt reflects Balance of Payments support e.g., IMF Extended Fund Facility inflows and non-cash commodity facilities such as the Saudi Oil Fund, that do not require rupee financing. Approximately, Rs 800 billion of the external debt increase is a valuation effect from exchange-rate movements, not new net borrowing.
The Ministry of Finance has reiterated that Pakistan’s debt trajectory is more sustainable today than suggested by headline rupee figures. The government’s continued focus on Debt-to-GDP reduction, early repayments, lower interest costs, and a stronger external account underscores its commitment to macroeconomic stability, reduced risk, and responsible fiscal management.
