As Pakistan navigates 2025, its economy grapples with a daunting debt load and persistent financial weaknesses. The nation’s total debt has soared past Rs67 trillion, leaving its fiscal health vulnerable to rising interest rates, a weakening currency, and the inefficiencies plaguing state-run enterprises.
Looking ahead, Pakistan’s economy is expected to maintain a cautious balance over the next few years, but a host of risks threatens to tip the scales. Slow GDP growth, a ballooning debt-to-GDP ratio, stagnant tax collections, mounting circular debt, and unpredictable natural disasters could unravel fiscal stability. A report from the Ministry of Finance, guided by the IMF, flags sluggish GDP growth as the biggest concern. If growth falls 1.5 percentage points below the projected 5.1 percent average—slipping toward the lackluster 3.5 percent seen in recent years—tax revenues would shrink, and deficits would spiral.
This weaker growth could lead to a Rs42.1 billion fiscal shortfall in FY2026, ballooning to Rs312.4 billion by FY2028. If government spending doesn’t adjust to these economic dips, the deficit could climb even higher—Rs92.8 billion in FY2026 and a staggering Rs713.4 billion over the three-year period. Such gaps would push the public debt-to-GDP ratio to dangerous levels, further straining Pakistan’s fragile finances.
To counter these risks, the government is crafting a strategy focused on smarter taxation. The plan includes temporary taxes on sectors that thrive during downturns, eventually transitioning to a flexible tax system that adjusts to economic conditions. On the spending side, the focus is on restraint—cutting non-essential projects during lean times and managing emergency funds more carefully to build reserves.
For long-term stability, Pakistan aims to transform its economy by diversifying industries, investing in education and skills, and reducing dependence on vulnerable sectors. However, weak revenue collection remains a critical challenge. The Finance Ministry’s report warns that tax and non-tax revenues often fall short of targets, relying heavily on stricter enforcement and higher rates rather than expanding the tax base.
In a worst-case scenario, if revenue growth only keeps pace with the economy—without improvements in collection efficiency—the shortfall could hit Rs1,170 billion in FY2026 and climb to Rs5,254 billion by FY2028. This would drive the deficit up by Rs516 billion in FY2026 and Rs2,539 billion over the three years. Another risk is a 30 percent drop in surplus dividends from the State Bank of Pakistan, which could deepen the deficit by Rs412 billion in FY2026 and Rs1,522 billion by FY2028. Similarly, a 20 percent shortfall in petroleum levy collections could widen the fiscal gap by Rs248 billion in FY2026 and Rs895 billion by FY2028.
Without new revenue sources to plug these gaps, Pakistan’s economic foundation risks further erosion, threatening the country’s ability to weather future shocks.
As of December 2024, Pakistan’s total debt stands at Rs67,034 billion, comprising Rs49,883 billion in domestic debt and Rs36,512 billion in external debt and liabilities. This massive debt load is highly sensitive to shifts in interest rates and exchange rates, which could significantly increase fiscal pressures if projections falter.
In one risk scenario, a 200-basis-point hike in domestic interest rates and a 100-basis-point rise in foreign rates could inflate debt servicing costs, pushing the fiscal deficit up by Rs617 billion in FY2026 and Rs3,025 billion cumulatively from FY2026 to FY2028. Similarly, a 10 percent depreciation of the Pakistani rupee would raise external debt servicing costs, adding Rs49 billion to the fiscal deficit in FY2026 and Rs171 billion over the same three-year period.
Another concern is the growing reliance on floating-rate debt, which exposes the government to greater interest rate volatility. This could drive up costs by Rs67.3 billion in FY2027 and Rs108.6 billion in FY2028. Additionally, if the government redistributes FY2029 debt maturities evenly across FY2026–2029, it would add Rs2.6 trillion annually to the fiscal deficit, though this would ease the repayment burden in FY2029.
To mitigate these risks, the government is working to reshape its debt profile by prioritizing longer-term, fixed-rate instruments to reduce exposure to rate fluctuations. It also plans to adhere strictly to fiscal deficit caps outlined in the Fiscal Responsibility and Debt Limitation Act of 2005, while conducting regular debt sustainability assessments to stay ahead of potential vulnerabilities.
To cut debt servicing costs, Pakistan is exploring concessional climate loans and green bonds as innovative financing options. Over the long term, boosting exports is a key strategy to stabilize the exchange rate and lessen the impact of currency risks on external debt. Improved coordination between monetary and fiscal policies is also expected to reduce uncertainty around domestic debt servicing.
State-owned enterprises (SOEs) remain a significant fiscal drain due to their inefficiencies and Public Sector Obligations (PSOs), which erode profitability and reduce dividend payments to the government. In 2026, SOEs are projected to contribute Rs116.1 billion in dividends under a baseline scenario, but this could fall to Rs89.7 billion—a 6.1 percent drop—in a less favorable scenario. This shortfall would widen the fiscal deficit by Rs137 billion cumulatively over FY2026–2028, equivalent to 0.07 percent of GDP.
The government’s obligation to prop up 17 major loss-making SOEs adds further strain. If support levels are calculated based on detailed SOE-specific assessments, the fiscal burden could reach Rs1,980 billion in FY2026 and Rs6,726 billion cumulatively over FY2026–2028, roughly 1.5 percent of GDP. After accounting for planned government support (Rs1,452 billion in FY2026 and Rs4,932 billion over FY2026–2028), the net fiscal risk is estimated at Rs528 billion for FY2026 and Rs1,988 billion for FY2026–2028.
Pakistan’s fiscal outlook is at a critical juncture. Rising debt, external shocks, and structural weaknesses threaten to undermine stability unless bold reforms are implemented. The government’s plans to extend debt maturities, boost exports, and tap into climate-focused financing provide a potential lifeline. However, without tackling SOE inefficiencies and improving revenue collection, fiscal stability will remain out of reach. The years ahead will test Pakistan’s ability to balance strategic financial planning with the resolve to enact meaningful change.