Ministry warns of 6 major economic shocks threatening debt stability

ISLAMABAD: With Pakistan’s public and publicly guaranteed debt surging to Rs84.8 trillion — equivalent to 74.5 per cent of the GDP — the Ministry of Finance’s Debt Sustainability Analysis (DSA) has warned of six potential economic shocks that could further strain debt levels between 2026 and 2028.

These include shocks to the federal primary balance, real GDP growth, interest and exchange rates, combined macro-fiscal indicators, and financial sector contingent liabilities.

As of the end of June 2025, Pakistan’s Public and Publicly Guaranteed (PPG) debt-to-GDP ratio stood at 74.5pc, depicting a year-on-year increase of 3.6 percentage points from 70.9pc at the end of June 2024.

The depreciation of the PKR against major currencies, coupled with easing inflation and a persistently high policy rate (as compared to inflation), has raised the real interest rate, thereby increasing the debt-to-GDP ratio. In contrast, the slight increase in real GDP growth and the rise in the primary surplus have helped reduce PPG debt as a percentage of GDP. Overall, the domestic PPG debt-to-GDP ratio rose to 49.8pc in FY2025 from 46.2pc in FY2024, while the external PPG debt-to-GDP ratio remained broadly unchanged during the same period.

This report examines the possible dimensions of debt that may challenge its sustainability and underscores the need for an optimal policy mix to safeguard macroeconomic stability and fiscal resilience in the medium term.

This report comprehensively analysed the public and publicly guaranteed debt dynamics, showing that Pakistan’s debt is projected to remain sustainable under the baseline scenario, supported by macroeconomic stability and fiscal consolidation.

A moderate risk arises from gross financing needs, which are expected to be adequately met through steady inflows from multilateral and bilateral partners, alongside stable domestic financing. While the debt-to-GDP ratio remains within the prudent 50-70pc threshold typical for emerging economies, sensitivity analysis highlights vulnerabilities.

These vulnerabilities are most evident under shocks to the federal primary balance, slower economic growth, exchange rate depreciation, higher interest rates, and the realisation of contingent liabilities. Recognising these risks, the government stresses the need for continued fiscal discipline and structural reforms and remains committed to keeping public debt on a sustainable trajectory.

Considering the critical role of federal primary surplus to keep the debt-to-GDP ratio on a sustainable path, the government is prioritising increasing the tax-to-GDP ratio through revenue mobilisation, improving tax administration, enhancing tax compliance, and broadening the tax base. Moreover, the government is focusing on adopting a performance-based budgeting process to improve expenditure management. This approach links budget allocations to specific performance outcomes and objectives, ensuring that funds are used efficiently and effectively to achieve desired results, thereby improving the fiscal space.

A stable exchange rate, aligned with market fundamentals, is essential for sustaining public debt. In FY2025, rigorous policy measures helped narrow the current account deficit through higher exports and remittances, strengthened foreign exchange reserves, and improved regulation of the foreign exchange market, all of which supported the domestic currency to remain stable. The government remains committed to structural reforms, with a strong focus on export-led growth and the IT sector, which are expected to reinforce exchange rate stability going forward.

The government has adopted a multi-faceted debt management strategy to improve sustainability by diversifying borrowing sources and balancing costs and risks. Key actions include extending the maturity of domestic debt, smoothing repayment schedules, and improving transparency in debt issuance. The government is focusing on meeting financing needs and reducing borrowing costs by introducing various financial instruments, availing concessional borrowing from diversified sources, tapping international capital markets, and encouraging non-resident investment in government securities.

Going forward, the DSA report says that sustainable economic growth is critical for strengthening the government’s capacity to manage debt. The government is therefore implementing structural reforms to achieve sustainable export-led growth by boosting productivity across all sectors, economic diversification, enhancing competitiveness, and fostering innovation and technological development.