By Dr Hafiz A Pasha

Copyright brecorder

The State Bank of Pakistan has recently released estimates of the stock of debt of the country as of the end of 2024-25. The total debt is estimated at Rs 95,832 billion, equivalent to 83.6 percent of the GDP.

The public debt, both domestic and external, adds up Rs 80,518 billion, implying the dominant share in total debt of 84 percent. The public debt to GDP ratio stands at 70.2 percent of the GDP.

The burden of public debt per capita in Pakistan now is Rs 318,252. A decade ago, it was Rs 90,047 per person. Therefore, the burden has risen rapidly, with an annual growth rate of almost 13 percent, implying a doubling of the burden every six years.

The overall quantum of public debt has also shown a tendency to rise as a percentage of the GDP. Fifteen years ago, in 2009-10, it was 54.6 percent of the GDP, rising to 57.1 percent by 2014-15 and to the all-time peak of 76.6 percent in 2019-20. It declined sharply to 67.8 percent of the GDP in 2023-24, but has risen again beyond 70 percent of the GDP in 2024-25.

The composition of public debt has also changed significantly. The share of external debt was 40.7 percent in 2009-10. It was falling up to 2014-15, reaching a low of 29.8 percent. However, the share of external debt has been rising since then and now stands at 32.3 percent.

A comparison can be made of the level of public debt as a percentage of the GDP, currently at 70.2 percent in Pakistan, with selected Asian countries. The lowest level of public debt is in Bangladesh at 36.4 percent of the GDP. The highest level is observed in Sri Lanka at 96.8 percent of the GDP. In India, the ratio is 57.1 percent of the GDP, while in Indonesia and Thailand it is 40.2 percent and 61.1 percent of the GDP, respectively.

The fundamental question is what factors contribute to the evolution of the public debt to GDP ratio? Clearly, the key determinant is the size of the federal budget deficit as a percentage of the GDP. The higher the budget deficit the greater is the need for borrowings to finance and cover the deficit, leading thereby to faster accumulation of debt.

The budget deficit has two components of debt servicing and primary surplus or deficit respectively. The level of debt servicing has seen a quantum jump since 2020-21 from 5.8 percent of the GDP to 7.7 percent of the GDP by 2024-25. This is due to fast accumulation of debt and a quantum jump in interest rates in recent years. The policy rate of the SBP reached an all-time peak of 22 percent in 2023-24. The rate has come down but still remains high at 11 percent.

The size of the federal primary surplus or deficit has fortunately moved in the right direction, thereby limiting the increase in public debt. There was a large primary deficit of Rs 2,428 billion in 2021-22, equivalent to almost 3.6 percent of the GDP. A primary surplus has been generated by the federal government of 1.6 percent of the GDP in 2024-25.

The transformation from a primary deficit to a surplus is attributable to quantum jump in net federal revenues as a percentage of the GDP. They were 7.4 percent of the GDP in 2020-21 and have since risen to 8.7 percent of the GDP in 2024-25.

The next component of the increase in public debt is the rise in the stock of external debt and in the rupee value of this debt. This depends on the jump in the size of the external debt in USD and the extent of devaluation of the rupee.

The faster increase in the stock of external public debt in USD was from 2014-15 at USD 57 billion to USD 91.7 billion in 2019-20, with an annual growth rate of almost 10 percent. This has moderated substantially since 2019-20 to 2.5 percent and at the end of 2024-25 the level of external public debt is USD 103.8 billion.

The slowdown in the increase in external debt is not necessarily a result of choice but because Pakistan’s reduced access to borrowing from international commercial banks and by flotation of Euro/Sukuk bonds. This is the consequence of the decline in credit rating of Pakistan in 2022-23, when the country came close to default.

The rupee value of public external debt has increased sharply from Rs 12,433 billion in 2020-21 to Rs 23,417 billion in 2024-25, implying thereby a high annual growth rate of almost 16 percent. This is a reflection of the rapid decline in the value of the rupee of 71 percent from Rs 165.10 per USD in June 2020 to Rs 283.00 per USD in June 2025. The devaluation of the rupee was as much as 40 percent in 2022-23.

Fortunately, due to a low current account deficit in 2023-24 and a surplus in the current account of the balance of payments in 2024-25, along with larger IMF funding, there has been a significant improvement in the level of foreign exchange reserves and stabilization in the value of the rupee during the last two years.

The above developments have led to a divergence in the cumulative growth of domestic and external public debt. The former has shown a cumulative increase of 107 percent after 2020-21. The corresponding magnitude in the case of external debt is 88 percent. Now, over two-thirds of the public debt is in the form of domestic debt.

There is a need also to look at the composition of domestic public debt. A visible increase is in the share of long-term debt in the form of government bonds, while the share of unfunded debt has declined sharply.

The years, 2023-24 and 2024-25, have seen 73 percent of the increase in domestic public debt in the form of long-term government bonds. This is surprising. Given the peak in interest rates, a ‘lock-in’ effect should have been avoided. However, banks have preferred long-term bonds with high returns. Therefore, this will restrict the future fall in the growth rate of public domestic debt, despite a big fall in interest rates.

There is a need also to look at the original Fiscal Responsibility and Debt Limitation (FR&DL) Act of 2005. This Act includes IMF debt in public debt but reduces the level of public debt by the cash deposits of the federal government in banks.

Accordingly, the quantum of net public debt is reported by the SBP at Rs 73,271 billion, as of end-June 2025. This is equivalent to 63.9 percent of the GDP and significantly lower than the level of gross public debt at 70.2 percent of the GDP.

The Act has also specified that the net public debt of Pakistan should remain below 60 percent of the GDP. This requirement continues to be violated. The IMF Programme has also projected the gross public debt to GDP ratio. The expectation is that it will come down to close to 60 percent of the GDP, with annual decline on average of 2 percentage points.

The initial outlook on the likely evolution of public debt in 2025-26 is positive. The federal budget deficit is pitched at a relatively low level of Rs 6,450 billion, equivalent to 5.0 percent of the GDP. The net inflow of external borrowing is expected to be small at USD 4 billion and the expectation is that exchange rate will continue to be relatively stable.

However, the devastation caused by floods and the increased spending directly in the form especially of grants and subsidies could lead to an increase in the federal budget deficit by over 1 percent of the GDP. This will also be due to a likely slowdown in the growth of tax revenues.

Pakistan’s public debt to GDP ratio today stands at close to 70 percent of the GDP. It has risen significantly in 2024-25 and is much higher than countries like Bangladesh, India, Indonesia and Thailand. Efforts will need to be made to bring it down to 60 percent of the GDP in the next few years in line with the ceiling imposed by the Fiscal Responsibility and Debt Limitation Act of 2005. And, the IMF Programme.

Copyright Business Recorder, 2025