Pakistan's debt-to-GDP ratio expected to decrease from 2025 to 2027

Pakistan’s public debt is becoming more sustainable due to economic stability and better fiscal management, while the debt-to-GDP ratio is expected to decrease from 2025 to 2027, according to a report by the Ministry of Finance.

However, some risks remain — the country will need to cover its financing needs mainly through funds from international partners and domestic sources. Sustainable inflows from these sources are crucial.

While the debt-to-GDP ratio is below the safe benchmark, it could be affected by economic shocks like changes in the primary balance, exchange rates, interest rates, and economic growth.

Pakistan's external debt, which accounts for 33.8% of the total public debt as of June this year, is mostly from concessional loans. This poses a currency risk, especially during times of high current account deficits and low foreign exchange reserves.

The remaining 66.2% is domestic debt, with a large portion being long-term. However, 74% of this domestic debt is at floating rates, which could be risky if interest rates rise.

To manage these risks, the government is focusing on increasing tax revenue, improving tax administration, and adopting performance-based budgeting. It is also working on maintaining a stable exchange rate and reducing the current account deficit through increased exports and remittances, according to the Ministry of Finance report.

The government plans to diversify borrowing sources, extend the maturity of domestic debt, and improve transparency in debt issuance. It aims to reduce borrowing costs by introducing new financial instruments and encouraging investment in government securities.

Overall, sustainable economic growth is key to managing debt, according to the report. The government is implementing reforms to boost productivity, diversify the economy, and attract private and foreign investment. These efforts are vital for economic growth and market confidence.