Pakistan’s debt-to-GDP ratio drops to 65% in August

Pakistan’s central bank has reported a significant reduction in the government's debt-to-GDP ratio, which fell to 65% in August from 73% in the same month last year.

This improvement is largely attributed to a decline in the external debt-to-GDP ratio, which dropped from 27.6% to 20.2% over the same period.

The primary factor behind this decline is the appreciation of the Pakistani rupee against the US dollar, with the exchange rate improving from 305.61 in August 2023 to PKR 278.57 in August this year.

Despite this positive trend in external debt, the central government’s total domestic debt increased by 21%, reaching PKR 48.34 trillion, up from PKR 39.8 trillion in August 2023. Conversely, the central government’s external debt saw a 9% reduction, falling to PKR 22.02 trillion from PKR 24.2 trillion in the same period.

The rationale behind borrowing from external sources is to leverage foreign savings for productive investments, especially in countries with low domestic savings. These investments are expected to generate sufficient resources over time to service and repay the debt. However, an analyst noted that this borrowing, investment, and repayment cycle has not functioned as intended in Pakistan.

Additionally, the ratio of external debt servicing to foreign exchange reserves is projected to decrease from 195% in fiscal year 2023-24 (FY24) to 89% in FY25. Pakistan's overall debt-to-GDP ratio has also declined to 70% in FY24, driven by nominal GDP growth outpacing debt growth due to higher inflation.