Pakistan’s Debt Burden and Fiscal Challenges

Pakistan’s government debt has surged to Rs78.5 trillion by the end of December 2025, marking a rise of Rs641 billion in just six months of FY26. Despite recording a budget surplus during this period, the country’s reliance on borrowing continues to weigh heavily on fiscal consolidation efforts.

The State Bank of Pakistan (SBP) data shows that domestic debt remains the primary driver of this increase, climbing to Rs55.4 trillion. Instruments such as Pakistan Investment Bonds (PIBs), sukuk, and Treasury bills highlight the government’s dependence on local banking liquidity. In contrast, external debt fell slightly to Rs23.1 trillion, reflecting contained foreign borrowing but persistent pressure on domestic interest costs.

Experts note that while the month-on-month pace of debt growth appears manageable, the overall debt stock poses long-term risks. Interest rate movements could further strain fiscal stability, making debt management a critical challenge for policymakers.

Gross public debt rose to Rs81.3 trillion in the first half of FY26, while total debt and liabilities reached Rs95.5 trillion. Although debt servicing costs fell compared to last year, interest payments still consumed Rs3.7 trillion in July–December FY26. This reduction offers some relief, but the sheer size of outstanding obligations continues to limit fiscal flexibility.

The government has emphasized its efforts to retire Rs3.65 trillion in domestic debt ahead of schedule since late 2024. However, debt-to-GDP ratios remain alarmingly high at 70.7%, exceeding the legal ceiling set by the Fiscal Responsibility and Debt Limitation Act. This unsustainable level of borrowing consumes nearly half of the annual budget, leaving little room for development and social spending.

For ordinary citizens, the rising debt translates into heavier tax burdens and reduced public investment. With external debt servicing reaching $4.1 billion in the second quarter of FY26, Pakistan’s financial outlook underscores the urgent need for structural reforms and disciplined fiscal management.

In short, while short-term measures have provided breathing space, Pakistan’s debt trajectory highlights the pressing need for long-term strategies to ensure economic stability and reduce reliance on borrowing.