Pakistan’s Interest Costs Surge: Rising Debt and Lack of Transparency in Reporting

February 7, 2025 Mahi Bukhari

Pakistan’s public debt continues to surpass sustainable levels, violating key fiscal laws due to soaring interest payments. Despite efforts to stabilize the exchange rate and reduce certain expenditures, the government has struggled to contain rising debt, as confirmed in the Debt Policy Statement 2025 by the Ministry of Finance.

In addition to the country’s worsening debt situation, concerns about transparency in reporting debt indicators have been raised by the World Bank Debt Heat Map Report. The delayed publication of key debt-related reports and incomplete disclosures about public-private partnership guarantees reflect ongoing issues in Pakistan’s fiscal management.

Let’s explore the critical aspects of Pakistan’s mounting debt, the violations of fiscal laws, and the government’s strategies for future debt management.

Pakistan’s Public Debt Exceeds Legal Limits

Debt-to-GDP Ratio Breaches Legal Limit

According to the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005, Pakistan’s public debt should not have exceeded 56.75% of GDP for the fiscal year 2023-24. However, the latest official report confirms that the country’s total public debt stood at 67.5% of GDP by June 2024.

For the fiscal year 2024-25, the ceiling is further tightened to 56%, posing a significant challenge for the government to reduce its mounting debt.

Breakdown of Pakistan’s Debt

As per the latest figures:

Total Public Debt: Increased by 13% to reach Rs71.2 trillion.
Domestic Debt: Grew to Rs47.2 trillion, accounting for 66% of total public debt.
External Debt: Reached Rs24.1 trillion, with its share declining to 34% due to limited borrowing options.

A key reason for the reduced share of external debt is Pakistan’s poor credit rating, which has restricted access to global financial markets and foreign banks.

Impact of Interest Payments on Debt

A major factor contributing to Pakistan’s worsening debt crisis is exorbitant interest costs.

The government spent Rs8.2 trillion on interest payments alone in the last fiscal year.
This amount was Rs2.5 trillion higher than the previous year, marking a 43% increase.
The State Bank of Pakistan (SBP) maintained a high policy rate of 22%, which further fueled debt servicing costs.

Despite achieving a primary budget surplus, the rising interest burden nullified any potential fiscal relief.

Transparency Issues in Debt Reporting

Delayed and Incomplete Reporting

The World Bank’s Debt Heat Map Report highlights Pakistan’s failure to ensure timely and transparent reporting of its debt data.

The Annual Debt Bulletin for the last fiscal year was not published on time.
The Annual Borrowing Plan was released over two months late.
No information was provided regarding public-private partnership guarantees, raising concerns about undisclosed liabilities.

Government’s Response to Reporting Delays

When questioned about these transparency issues, Finance Ministry Spokesperson Qumar Abbasi stated that delays were due to human resource-related reshuffling within the debt office.

Furthermore, challenges in integrating debt data among different government departments remain unresolved. Efforts are still underway to synchronize records between the central bank, finance ministry, and economic affairs ministry.

Debt Management Strategy: A Mixed Performance

Short-Term Debt Maturity Increases Financial Risks

The Debt Policy Statement 2025 reveals that Pakistan’s debt structure remains highly risky, with an over-reliance on short-term borrowings.

The average time to maturity (ATM) of domestic debt remains 2 years and 8 months, making the country vulnerable to refinancing risks.
The average maturity of external debt has decreased from 6 years, 4 months to 6 years, 2 months, increasing exposure to short-term liabilities.
The government has been unable to issue long-term sovereign bonds, further limiting financial flexibility.

Dependence on Domestic Banks

The government’s reliance on commercial banks for borrowing continues to grow, allowing banks to exploit high-interest rates.

Permanent debt in total domestic debt increased to 70%, driven by Pakistan Investment Bonds (PIBs).
The stock of PIBs rose from Rs22 trillion to Rs28 trillion by June 2024, indicating a shift towards long-term domestic borrowing.

Despite these efforts, the country remains heavily dependent on short-term borrowing, which carries substantial risks.

Exploring Alternative Debt Financing

To mitigate borrowing challenges, the government is exploring alternative funding sources, including:

Green Sukuk and Sustainability-Linked Bonds
Panda Bonds (Chinese market debt instruments)
Debt-for-Nature and Debt-for-Climate Swaps

Additionally, a buyback and exchange policy is being considered to optimize debt servicing by taking advantage of favorable secondary market yields.

The Road Ahead: Key Challenges and Recommendations

Challenges in Debt Management

High Interest Payments: Continued high SBP policy rates will increase debt servicing costs.
Limited Access to International Capital Markets: Poor credit ratings restrict external borrowing.
Short-Term Debt Risks: The 2-year debt maturity period increases vulnerability to economic shocks.
Lack of Transparency: Delayed reporting erodes investor confidence and affects debt management credibility.

Recommended Strategies for Debt Control

To address these challenges, the government should:

✅ Enhance Transparency: Publish debt reports on time and provide complete disclosures.
✅ Extend Debt Maturity: Issue longer-term bonds to reduce refinancing risks.
✅ Diversify Funding Sources: Expand access to alternative financial instruments.
✅ Reduce Fiscal Deficit: Focus on tax reforms and expenditure control to limit new debt accumulation.
✅ Improve Credit Ratings: Implement economic stabilization measures to restore global investor confidence.

Conclusion

Pakistan’s rising interest costs and unsustainable debt levels pose significant risks to economic stability. Despite efforts to control fiscal deficits, the government’s overreliance on domestic borrowing and short-term debt continues to fuel financial uncertainty.

To achieve long-term debt sustainability, Pakistan must adopt proactive debt management strategies, enhance fiscal transparency, and explore alternative funding options. Addressing these critical issues is essential to restore investor confidence and stabilize the country’s financial future.

FAQs

1. What is the current debt-to-GDP ratio of Pakistan?

As of June 2024, Pakistan’s total public debt stands at 67.5% of GDP, exceeding the legal limit of 56.75% set under the FRDL Act.

2. Why are Pakistan’s interest payments so high?

Pakistan’s interest payments are high due to the SBP’s 22% policy rate, increased domestic borrowing, and limited access to low-interest external financing.

3. What measures is the government taking to manage debt?

The government is exploring alternative financing options, including Green Sukuk, Panda Bonds, and Debt Swaps, along with a buyback and exchange policy to optimize debt management.

4. How does Pakistan’s poor credit rating affect its debt?

A poor credit rating limits access to international loans and foreign investments, forcing the government to rely on high-interest domestic borrowing.

5. What steps can Pakistan take to reduce its debt burden?

Pakistan can reduce its debt burden by enhancing fiscal transparency, extending debt maturity, improving tax revenues, and controlling unnecessary expenditures.