Significant Drop in Interest Payments Projected for FY26

The federal government anticipates a substantial fiscal reprieve with an estimated 16% decrease, equivalent to Rs 1.57 trillion, in interest payment obligations for the upcoming fiscal year (FY26). This projection is primarily attributed to a notable reduction in policy rates.

This decrease has also played a role in the contraction of the overall federal budget outlay, which has been reduced from Rs 18.877 trillion in FY25 to Rs 17.573 trillion for the next fiscal year.

With the policy rate experiencing a considerable decline of 11% over the past year, the government has adjusted its forecasts for the next fiscal year accordingly.

Budget documents for FY26 indicate that the federal government projects total interest payments of Rs 8.207 trillion, a significant reduction from the Rs 9.775 trillion estimated for FY25. This reflects a sharp decrease of 16%, amounting to Rs 1.568 trillion.

Pakistan’s economy has demonstrated consistent signs of stabilization and recovery over the past two fiscal years (FY24 and FY25), propelled by proactive government initiatives and effective macroeconomic management.

Inflation has slowed substantially, foreign exchange reserves have been bolstered, and the exchange rate has stabilized. Consequently, the State Bank of Pakistan (SBP) commenced a gradual easing cycle in June 2024, cumulatively lowering the policy rate by 1100 basis points, or 11%, from 22% to 11% as of May 2025.

According to budget documents, the projected interest payment for the upcoming fiscal year is also Rs 738 billion lower than the revised estimate of Rs 8.459 trillion. The most significant reduction is anticipated in domestic interest payments, projected at Rs 7.197 trillion for FY26, compared to the Rs 8.376 trillion forecasted for FY25, representing a decrease of Rs 1.542 trillion. Revised estimates indicate that domestic interest payments for the current fiscal year will amount to Rs 7.907 trillion.

External interest payments have seen a slight decrease of Rs 29.3 billion, reaching Rs 1.009 trillion for FY26, compared to Rs 1.039 trillion for the current fiscal year.

It is worth noting that lower-than-anticipated revenue collection has compelled the government to borrow from the domestic banking sector to cover the fiscal deficit, making the federal government a primary borrower within the banking sector.