Pakistan is projected to significantly reduce its public debt burden over the next three years, according to the Debt Sustainability Analysis Report FY2026–FY2028 issued by the Finance Division. The assessment indicates that total public debt, currently at 70.8 percent of GDP in FY2025, is expected to decline to 63.3 percent by FY2028, marking a meaningful shift toward improved fiscal sustainability. The outlook, while positive, underscores sensitivity to external and domestic risks that could challenge progress if growth falters or financial conditions tighten.
As of June 2025, Pakistan’s public debt stood at Rs80.52 trillion, rising from Rs71.24 trillion in the previous fiscal year. When factoring in publicly guaranteed debt totaling Rs4.27 trillion, the combined public and publicly guaranteed debt reached Rs84.79 trillion, equivalent to 74.5 percent of GDP. Despite the year-on-year increase in nominal debt, the government expects fiscal consolidation, a reduction in interest expenses, and stronger economic performance to gradually reduce debt levels relative to the economy’s size.
The report highlights a composition of debt where domestic borrowing constitutes 67.7 percent of the total. A notable feature of domestic liabilities is the high share of floating-rate instruments, representing 80 percent of domestic debt as of June 2025, leaving the portfolio highly exposed to interest rate fluctuations. Long-term securities, including Pakistan Investment Bonds and Ijara Sukuks, dominate the structure, supporting long-term debt management objectives. The external debt share stands at 32.3 percent, largely sourced from concessional multilateral and bilateral funding. While the maturity profile exceeds six years on average, the presence of 24 percent short-term external obligations and 41 percent floating-rate exposure introduces refinancing and currency-related risk considerations.
The report attributes the improving debt trajectory to restored economic stability in FY2025, following a period of high inflation and currency pressure. Real GDP growth rose to 3 percent, while headline inflation moderated sharply to 4.5 percent from 23.4 percent a year earlier. Better fiscal management contributed to these outcomes, including lower markup costs that saved approximately Rs888 billion and tighter controls on non-targeted subsidies. The fiscal deficit narrowed to 6.2 percent of GDP, outperforming targets, while the primary balance posted a surplus of 1.6 percent of GDP.
Stabilization measures helped contain exchange rate volatility and curb informal market distortions. Improved currency discipline and tighter oversight of cross-border transactions contributed to enhanced sovereign credit perceptions and restored access to international markets. With macroeconomic stabilization achieved, the medium-term outlook forecasts real GDP growth rising from 4.2 percent in FY2026 to 5.7 percent in FY2028, supported by investment and export-led expansion in agriculture, technology, renewable energy, mining, and pharmaceuticals. Inflation is expected to remain between 6.5 percent and 7.5 percent, while foreign reserves and external balance stability benefit from higher exports, remittances, and foreign direct investment.
Despite optimistic projections, the report emphasizes that debt sustainability remains vulnerable to adverse shocks. A slowdown in growth, exchange-rate depreciation, or increased borrowing costs could alter the trajectory. In a downside scenario where GDP growth slows significantly for two consecutive years, the debt-to-GDP ratio could rise to 71.1 percent by FY2028. Under a combined macro-fiscal stress event, the ratio could escalate to 75.3 percent, posing significant risks for fiscal stability. Gross financing needs are anticipated to decline from 26.1 percent of GDP in FY2025 to 15.6 percent by FY2028, approaching but slightly exceeding the IMF benchmark.
To mitigate risks, the government has outlined a debt management strategy centered on maturity extension, diversified borrowing channels, and increased reliance on concessional financing. Plans include encouraging overseas investment in government instruments, re-engaging global markets under improved credit conditions, and advancing fiscal reforms to widen the tax base and enhance digital tax administration. Expenditure discipline will be strengthened through targeted subsidy rationalization, pension system reforms, and restructuring of public-sector expenditures.
The report reinforces the need for continued fiscal prudence to secure long-term debt sustainability and maintain market confidence as Pakistan consolidates recent macroeconomic gains.
Follow the PakBanker Whatsapp Channel for updated across Pakistan’s banking ecosystem.