In a landmark move underscoring Pakistan’s renewed focus on fiscal discipline, the federal government has announced the early retirement of Rs. 1.133 trillion worth of debt owed to the State Bank of Pakistan (SBP). The repayment, executed on August 29 by the Debt Management Office, is one of the largest single settlements in the country’s fiscal history and represents a significant step toward stabilizing domestic finances.
The Ministry of Finance (MoF) confirmed that the repayment follows an earlier settlement of Rs. 500 billion on June 30. Together, these transactions bring the total debt repaid in just 59 days to Rs. 1.633 trillion. Over the past 12 months, the government has cleared more than Rs. 2.6 trillion in debt to both SBP and commercial banks, a scale of early repayments described by the ministry as unprecedented.
According to MoF officials, these repayments were made possible through a combination of record profits generated by the SBP and a sharp surge in federal revenues. The central bank’s surplus profit alone contributed Rs. 2.5 trillion to government coffers, bolstered by historically high interest rates. Overall, federal revenues recorded a 186 percent year-on-year increase during FY2024-25, enabling the government to accelerate debt settlement while also meeting other fiscal obligations.
The ministry emphasized that the early repayments not only reflect a commitment to discipline but also significantly improve fiscal health. Nearly 30 percent of SBP debt originally scheduled to mature in 2029 has now been retired early. As a result, outstanding liabilities to the central bank have fallen from Rs. 5.5 trillion to Rs. 3.8 trillion. The ministry highlighted that this has reduced refinancing risks, improved fiscal space, and extended the average maturity of domestic debt from 2.7 years in FY2024 to 3.8 years in FY2025—the sharpest one-year improvement in the country’s history and ahead of IMF program targets.
Another benefit has been reduced financing costs. With interest rates trending downward, the government has already secured savings of nearly Rs. 800 billion, money that otherwise would have been diverted toward interest payments. These savings, the ministry noted, translate into relief for taxpayers by easing pressure on future budgets.
Looking ahead, the government is prioritizing reforms through its Medium-Term Debt Management Strategy (MTDMS) for 2026–28. The strategy focuses on shifting borrowing toward longer-tenor fixed-rate and zero-coupon bonds to mitigate interest rate volatility and reduce refinancing risks. The plan also outlines a gradual retirement of SBP-held securities before FY2029. Importantly, under IMF agreements, any windfall from SBP dividends exceeding 1 percent of GDP will be directed toward further debt reduction.
Despite these advances, challenges remain. Domestic debt continues to carry a high average interest rate of 15.82 percent, far above the 4.4 percent cost of external debt due to concessional financing. Interest payments are projected to absorb nearly 6 percent of GDP in FY2025, underscoring the burden of servicing obligations. Moreover, around 80 percent of domestic debt is subject to re-fixing in FY2026, with the average time to re-fixing just 1.2 years compared to 4.5 years for external liabilities. This heavy reliance on floating-rate instruments leaves the government vulnerable to interest rate fluctuations.
Nonetheless, the MoF maintains that early repayments, longer debt maturities, and a disciplined borrowing framework represent a decisive shift in Pakistan’s fiscal management. The combination of strong revenues, record SBP profits, and proactive debt strategies has boosted investor confidence and strengthened the country’s financial credibility.
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