Pakistan Achieves Record Debt Retirement, Shifts Fiscal Strategy
Islamabad - Pakistan’s Ministry of Finance (MoF) has announced a significant milestone in the nation’s fiscal history: the early retirement of over Rs2.6 trillion in debt within less than a year. This unprecedented action, encompassing both central bank and commercial debt, signals a decisive move away from past practices of heavy borrowing.
The debt retirement is a core component of the government’s strategy to bolster public finances and rebuild fiscal credibility. Previously, reliance on borrowing limited available funds and increased financial risks. The government has now initiated a programme of “debt discipline,” proactively retiring 30% of its debt to the State Bank of Pakistan (SBP) before its scheduled maturity in 2029. This has reduced government debt held by the SBP from Rs5.5 trillion to Rs3.8 trillion,mitigating risks and freeing up fiscal space.
This strengthened fiscal resilience is further evidenced by a substantial increase in the average maturity of domestic debt, rising to 3.8 years in FY24 from 2.7 years – the largest single-year improvement on record and exceeding targets set by the International Monetary Fund (IMF). Falling interest rates contributed approximately Rs800 billion in savings, preventing a corresponding increase in the tax burden on citizens.
The ability to undertake this pre-mature debt retirement was largely fueled by an 186% growth in federal revenues, primarily driven by a surplus profit of Rs2.5 trillion from the SBP in FY2024-25.
Looking ahead, the government’s medium-Term Debt Management Strategy (MTDMS 2026-28) prioritizes increasing the issuance of pakistan Investment Bonds (PIBs), fixed-rate bonds, and zero-coupon bonds. This aims to lower refinancing and interest rate risks. The strategy also focuses on the gradual repayment of securities held by the SBP to further reduce refinancing risk in FY2029.
With IMF approval, the plan will leverage any SBP dividend exceeding 1% of GDP for debt retirement. The MoF anticipates strong demand from long-term institutional investors for longer-dated zero-coupon bonds,which align with their investment needs. The recently launched two-year zero-coupon bond has already garnered significant interest from both commercial banks and insurance companies,and increased issuance is planned.
Despite these positive developments, the MoF acknowledges that the cost of debt remains high in FY2025, particularly for domestic borrowing. The overall weighted average interest rate stands at 11.9%,largely due to the considerably higher cost of domestic debt compared to external sources. External debt carries a weighted average interest rate of 4.4%,benefiting from a high proportion of concessional and semi-concessional financing,while domestic debt averages 15.82%. Consequently,interest payments consumed nearly 6% of GDP in FY2025.
The MoF also highlighted a growing risk related to interest rates within the domestic debt portfolio. A shift towards floating-rate domestic debt instruments,driven by market demand,has increased exposure to rate fluctuations. This trend was particularly pronounced in FY2023, with investors favoring short- to medium-term floating-rate PIBs, especially the five-year tenor. This preference stemmed from expectations of continued interest rate increases, peaking at 22% during FY2023.
Currently, approximately 80% of domestic debt is subject to interest rate re-fixing in FY2026, with an average time to re-fixing (ATR) of just 1.2 years. In contrast, external debt has a higher ATR of 4.5 years, reflecting a larger share of fixed-rate instruments.
(Published in Dawn, September 1st, 2025)
