The government borrowed almost five times more from banks in the first seven months of FY26 compared to the same period last year, highlighting aggressive fiscal expansion despite tight budgetary and financial constraints. This sharp rise in borrowing reflects increasing reliance on domestic banks to finance expenditures at a time when fiscal consolidation was expected. The government’s heavy absorption of bank liquidity has also crowded out the private sector, which is already struggling under tight monetary policy, elevated energy tariffs, and rising input costs.
Data issued by the State Bank of Pakistan (SBP) shows that the government borrowed Rs1,912 billion from commercial banks during 7MFY26, compared to Rs408 billion in the same period last year. The government had ended FY25 with total borrowing of Rs5.4 trillion, suggesting that most of that borrowing occurred in the second half of the fiscal year. However, the current pace indicates a more accelerated trend, as nearly Rs2 trillion has already been borrowed within seven months. If this trajectory continues, total borrowing for FY26 could surpass the Rs5.4 trillion recorded in FY25. It is worth noting that the government had borrowed Rs8.5 trillion in FY24 to meet rising current expenditures, particularly debt servicing and administrative costs.
Debt servicing has now become a major fiscal burden, with interest payments consuming the largest share of government spending — approximately Rs8 trillion in FY25. As administrative expenditures continue to rise and revenue mobilisation remains weak, the government has increasingly resorted to borrowing while compressing development spending, a pattern that has persisted over the past three years. According to official documents, Pakistan’s total debt and liabilities have climbed to $138 billion, driven by new borrowings and escalating interest obligations.
Government debt increased by Rs641 billion, or 0.82%, by the end of December 2025, reflecting ongoing borrowing needs and persistent fiscal pressures. According to SBP data, total government debt reached Rs78.5 trillion, up from Rs77.8 trillion in June. The debt stock rose 1.3% month-on-month and 9.6% year-on-year, underscoring the upward trajectory of public liabilities. Domestic debt stood at Rs55.4 trillion by December, increasing by Rs891 billion from June. Meanwhile, external debt declined marginally by 1% to Rs23.1 trillion compared with June, but it rose 1.1% month-on-month and 6.4% year-on-year. Gross public debt climbed to Rs81.3 trillion in the first half of FY26, while total debt and liabilities reached Rs95.5 trillion, up from Rs87.9 trillion in December 2024.
High debt levels — now consuming nearly 50% of the annual budget — have significantly reduced fiscal space for development and social sector spending, placing an indirect burden on ordinary citizens through higher taxation, inflationary pressures, and reduced public services. Pakistan’s total external debt and liabilities stood at $138 billion by December, with $4.1 billion spent on debt servicing during the second quarter of FY26 alone, including $1.3 billion in interest payments and $2.7 billion in principal repayments.
Pakistan’s external debt also surged sharply during the first half of the current fiscal year, reaching Rs1,272 billion. Official data from the Economic Affairs Division indicates that loans and grants increased by 29% compared to the same period last year — an increase exceeding Rs280 billion. Between July and December, Pakistan secured Rs1,254 billion in loans and Rs17.67 billion in grants. Non-project aid totalled Rs785 billion, including Rs458.72 billion for direct budgetary support, while project financing amounted to Rs487 billion.
Major inflows included Rs170 billion from Saudi Arabia and Rs137 billion from the Islamic Development Bank for oil facilities and other financial support. Pakistan also received $1.2 billion from the International Monetary Fund (IMF) and raised an additional $1.2 billion through Naya Pakistan Certificates, bringing total six-month external inflows to approximately $5.7 billion.
The Economic Affairs Division recently reported that interest payments on external loans have increased by 84% over the past three years. Total interest payments now stand at $3.59 billion annually, compared to $1.67 billion in 2022. This increase covers obligations to multilateral institutions such as the IMF, the World Bank, and the Asian Development Bank, as well as commercial banks and bilateral deposits from Saudi Arabia and China. Including both principal and interest, Pakistan currently spends around $13.32 billion annually on debt repayments. Net external debt rose by $1.71 billion last year, even as the country repaid $9.73 billion in loans over the past three years.
During the last fiscal year alone, Pakistan signed $10.64 billion in new loan agreements. These borrowings are intended to support development initiatives and manage liquidity needs, yet officials caution that rising debt servicing costs are severely limiting budget flexibility for essential expenditures. The rapid growth in domestic debt compared to external liabilities reflects a deliberate policy shift towards local financing amid volatile global financial markets and ongoing reform programmes with multilateral lenders. Nevertheless, the expanding debt stock continues to expose structural fiscal weaknesses, including persistent budget deficits, narrow tax bases, and high interest obligations.
Economic experts observe that while month-on-month increases may appear manageable in isolation, sustained high debt levels and mounting interest costs pose serious risks to fiscal sustainability and macroeconomic stability. Persistent borrowing, combined with slow economic growth, could undermine investor confidence and limit the government’s ability to stimulate productive sectors.
In view of these challenges, urgent measures are required to contain the growth of public debt. Strengthening the industrial base, promoting export-led growth, broadening the tax net, and rationalising non-development expenditures are critical steps. Without structural reforms and sustained economic expansion, the country risks remaining trapped in a cycle of borrowing to service existing debt — a trajectory that threatens long-term fiscal stability and economic resilience.