At the heart of Pakistan’s debt crisis lies a fundamental structural weakness: a chronic fiscal
imbalance that has persisted for decades. The country’s inability to generate sufficient revenue
to meet its expenditure needs has created a dangerous dependency on debt accumulation
simply to remain solvent.
By fiscal year 2019—even before the pandemic’s economic devastation—public debt had
swelled to approximately 80% of GDP, representing an astonishing seven times the
government’s annual revenue intake.
By fiscal year 2019, interest payments alone were consuming nearly 40 percent of government
revenue—an extraordinary proportion that severely limits the state’s capacity to provide
essential public services or invest in development.
“Historical patterns from other countries indicate that maintaining a ratio above 25 percent for a
prolonged period is uncommon. Indeed, in the decade leading up to the global pandemic,
Pakistan was one of only five emerging markets or developing economies, out of a sample of
more than sixty countries, that saw this ratio reach or exceed 40 percent.”
only one other country ever even reached 30 percent, and only three others went beyond 25
percent during 2010–2019. Thus, international experience suggests that it is important not to let
the interest-revenue ratio rise above 25 percent.” Most alarmingly, following Pakistan’s latest
economic crisis and the subsequent escalation in borrowing costs, this ratio has soared to 60
percent—again placing the country as an extreme outlier globally and creating conditions that
are “clearly unsustainable, both fiscally and from a social stability perspective
Pakistan’s public debt burden reached Rs.74 trillion by the end of 2024, marking a 10 percent
increase from the previous year despite ongoing fiscal consolidation efforts.
Domestic debt constitutes 67% of the total debt, with external debt accounting for the
remaining 33%
The maturity profile of Pakistan’s domestic debt also reveals a deliberate and strategic pivot
toward medium and long-term borrowing instruments. This shift has significantly reduced the
country’s dependence on short-term Treasury Bills, the proportion of which declined
substantially from 24% in June 2023 to just 17% by December 2024. Correspondingly, medium
and long-term debt instruments grew from 64% to 71% during this same period—an attempt to
strengthen debt sustainability by extending duration and substantially mitigating rollover risks.
This restructuring was achieved primarily through the Ministry of Finance’s innovative Buyback
and Exchange Program, implemented as a central component of its strategic Liability
Management Operations (LMOs) in interbank treasury markets. The initiative led the
government to repurchase approximately Rs.1 trillion in treasury securities, generating
significant interest servicing savings of Rs.31 billion.
So, in the 2024 buyback case:
T-bills were issued at 20–21%.
Market rates dropped to 16%.
Their market price rose, but the government still chose to buy them back — likely because even
at a higher price, it was cheaper than keeping them to maturity and paying all the interest
The notion that defaulting on Pakistan’s debt could ease the economic burden is a dangerous
fallacy. While the government faces high interest payments and limited access to concessional
external financing, default offers little relief and significant harm. Over 85% of interest payments
are owed to domestic creditors—primarily banks—so even a complete halt on external debt
payments would barely reduce the overall burden. Meanwhile, defaulting externally would
trigger severe consequences, such as loss of access to international capital markets, currency
depreciation, and increased economic isolation. On the domestic side, more than half of
government debt is held by banks, and these securities make up over 50% of total banking
assets. A haircut, even as modest as 10%, could wipe out the banking sector’s capital base,
destabilize the financial system, and impact households, depositors, and pension funds. Thus,
both external and domestic defaults would bring more harm than help, offering minimal fiscal
relief while risking widespread economic damage.
Pakistan’s debt crisis requires a comprehensive approach, combining fiscal discipline with
significant concessional financing from international lenders. Tax reforms and spending cuts
alone won’t reduce interest payments enough, so concessional loans are crucial. Lenders must
increase their support and ensure transparency to improve Pakistan's debt management.
Concessional financing should focus on infrastructure and climate resilience projects, as well as
retiring outdated energy projects. A sustainable solution also needs improved revenue
collection, bold international support, and strategic investments in growth sectors. The current
approach is insufficient, and stronger measures are needed to resolve the crisis.
