The understated debt burden

Pakistan’s debt burden has become the defining constraint of its fiscal and economic future. According to data released by the State Bank of Pakistan (SBP), the total government debt (excluding the International Monetary Fund) increased from Rs69 trillion in June 2024 to Rs78tr by June 2025. The public debt (including the IMF debt) increased to Rs80.5tr from Rs71.2tr in June 2024. Both the numbers understate the full level of the government’s indebtedness.

As per the SBP’s June 2025 summary, federal government debt stood at Rs80.5tr — up 13 per cent from the previous year. Yet this headline number understates reality. Once external deposits, foreign currency swaps, Special Drawing Rights allocations, non-resident rupee deposits, and the debts of public sector enterprises are added — roughly Rs7.6tr in obligations — the figure rises to Rs88tr, or 77pc of GDP. Add to this the accumulated arrears of the power and gas sectors — together approaching Rs5tr — and the effective public debt load climbs to around Rs93tr, about 81pc of GDP.

The speed of this accumulation is striking. In FY25 alone, public debt grew by Rs9.4tr, with domestic borrowing swelling to Rs56.48tr and external debt increasing by $5.2 billion. The government’s external debt and liabilities now hover around $111bn, a stark indicator of reliance on foreign lenders.

Servicing these obligations consumed Rs8.9tr in FY25, over half of total federal revenues, but a staggering 82.7pc of net (after transfers to the provinces) federal revenues. This left the fiscal deficit still wide at 5.9pc of GDP despite the expenditure cuts.

Pakistan’s debt-to-GDP ratio of 81pc (with circular debt) is above the emerging market average of 60–65pc, but the real stress lies in the servicing of it

Development spending was the first casualty, falling short of targets as funds were diverted to creditors. Economic growth limped at 2.7pc, stifled by high interest rates, chronic energy shortages compounded by circular debt, and external price shocks.

The FY26 budget tells the same story. Out of Rs17.4tr in projected outlays, nearly half — Rs7.5tr — is earmarked for debt servicing. That equals 77pc of net federal revenues despite the fall in interest rates, leaving almost no fiscal room for anything else: Rs2.8tr for defence, Rs1tr for pensions, Rs950bn for development, and token allocations for health, education, and social protection.

With $23bn in external repayments falling due this year, even this arithmetic rests on the assumption of IMF support and bilateral rollovers. The state’s fiscal sovereignty is being hollowed out by its obligations.

International comparisons lay bare the severity of the problem. Pakistan’s debt-to-GDP ratio of 77pc (or 81pc with circular debt) is above the emerging market average of 60–65pc. But the real stress lies not in just the ratio, but in the cost of servicing. India, with debt around 82pc of GDP, devotes 25–30pc of central revenues to interest. Brazil, with debt near 88pc, spends roughly 20–25pc. Turkey and Indonesia, both with debt-to-GDP ratios below 40pc, commit less than 15pc.

Pakistan, by contrast, surrenders nearly half of its federal revenues to interest alone. In relative terms, its servicing burden rivals or even exceeds Argentina’s — a country synonymous with fiscal distress. Unlike Japan, whose debt exceeds 200pc of GDP but is sustained by ultra-cheap domestic financing, Pakistan borrows at punishing costs and in currencies it cannot print, leaving it uniquely vulnerable to global interest rate and exchange-rate shocks.

This crisis has been years in the making. In 2015, Pakistan’s debt-to-GDP ratio was about 63pc. By 2018 it had crossed 76pc, and by 2022, amid the crisis, it breached 82pc. Successive governments pledged discipline but chose expedience: expenditures ballooned, tax reform was avoided, and borrowing filled the gap.

What was once creeping drift is now systemic paralysis. Each year, more revenue is locked into debt service, leaving less for investment in growth. Today’s 77pc debt-service-to-net-revenue ratio is not merely unsustainable — it is the culmination of a decade of evasion.

For ordinary Pakistanis, these abstractions mean rising electricity tariffs, heavier indirect taxes, and stagnant job markets. With poverty affecting more than 40pc of the population and inequality deepening, underinvestment in health and education is eroding long-term productivity. Youth unemployment remains high, feeding frustration and narrowing the path to social mobility. Debt service has become not just a fiscal constraint, but a social crisis.

The issue is not only the size of the debt, but its structure and cost. Heavy reliance on short-term domestic paper, loss-making public enterprises, and foreign-currency borrowing means that every depreciation, every global rate hike, every delayed bailout is transmitted directly into fiscal instability. The circular debt in energy acts as a parallel fiscal deficit, compounding the structural weakness.

Avoiding outright solvency crisis will require more than IMF stopgaps. The tax base must be broadened beyond the narrow group of salaried classes and formal businesses, spending on government must be cut, public enterprises must be restructured rather than repeatedly bailed out. Above all, fiscal transparency is indispensable. Until the government discloses all liabilities — including contingent and quasi-fiscal obligations — policy will remain a patchwork of half-truths, and public trust will continue to fray.

Pakistan’s debt burden has already breached the threshold of sustainability. The choice now is stark: summon the political will for reform, or remain trapped in a cycle where yesterday’s borrowing consumes each new budget.

The writer is the former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’

Published in Brackly News, The Business and Finance Weekly, September 22nd, 2025