Pakistan cuts interest costs to free up room for development spending: expert

KARACHI: Pakistan has significantly reduced the share of its revenue consumed by interest payments, offering some fiscal breathing room after years of debt-driven pressure that left little space for development spending.

According to data from Topline Securities, interest expenses as a percentage of total government revenue fell to an estimated 49 per cent in FY2025, down from a record 61 per cent just a year earlier. The government is now targeting a further reduction to 39 per cent in FY2026, signalling a potential shift towards increased allocations for health, education and infrastructure. “This is a remarkable improvement,” said Mohammed Sohail, CEO of Topline Securities, in a social media post on X (formerly Twitter) on Saturday. “But more progress is needed so critical spending can resume and grow.”

Interest payments had surged sharply following the macroeconomic crisis of recent years, peaking in FY24 as policy tightening and mounting debt obligations squeezed fiscal space. The current decline reflects stabilising interest rates, currency adjustments and efforts to raise revenue through tax reform.

Still, with nearly half of all government income going towards servicing debt, Pakistan remains vulnerable to shocks, including global rate hikes and domestic slippages in reform momentum.

The long-term trend in the chart shared by Topline shows how interest costs have grown steadily since FY18, jumping from 29 per cent of revenue that year to 43 per cent by FY19, before spiking in FY23 (59 per cent).