According to the Annual Debt Review for Fiscal Year 2025 prepared by the Debt Management Office, Pakistan’s overall public debt stock increased sharply from Rs71.2 trillion in June 2024 to Rs80.6 trillion by June 2025, reflecting an increase of nearly 13 percent. This surge also pushed per capita public debt from Rs294,098 to Rs333,041 during the same period.
Meanwhile, the Debt Policy Statement 2026, prepared under the Fiscal Responsibility and Debt Limitation (FRDL) Act for submission to the National Assembly, reveals an even more alarming picture. In FY2024-25, public debt breached the statutory ceiling by a staggering Rs16.8 trillion, reaching 70.7 percent of GDP against the maximum permissible limit of 56 percent set by Parliament.
In effect, public debt exceeded the legal threshold by a substantial 14.7 percent of GDP, underscoring the government’s persistent failure to observe fiscal discipline. The debt-to-GDP ratio climbed from 68 percent in June 2024 to 70 percent in June 2025, in clear violation of the 60 percent ceiling envisaged under the FRDL Act. It is pertinent to note that public debt comprises both domestic and external components. Domestic debt includes short- and long-term borrowing, national savings schemes, floating debt, and Naya Pakistan Certificates, while external debt consists mainly of loans from the IMF and friendly countries.
The government maintains that borrowing from domestic and external sources has been necessitated by slow growth in nominal GDP. Authorities also argue that the primary driver behind the expanding debt stock is the size of the fiscal deficit, shaped largely by the primary balance. Additionally, it is claimed that rising interest payments have been the principal contributor to debt accumulation in recent years.
In response, the government has recently attempted to curb the growth in debt stock by reducing interest payments. However, this approach is neither sustainable nor sufficient in the long run. A more durable solution lies in curbing other components of current expenditure, which remain the main reason for the government’s heavy reliance on borrowing, both domestically and externally. The steady expansion of current expenditure has also constrained the government’s ability to allocate adequate funds for the Public Sector Development Programme (PSDP), thereby undermining efforts to meet the development needs of a rapidly growing population.
Official documents detailing old and new loan agreements expose the long-standing weaknesses in the government’s spending framework, notably the absence of careful planning and prudent budgeting aligned with available resources. With little regard for fiscal discipline, government departments routinely overspend, and the resulting gaps are filled through fresh borrowing. This consumption-driven and debt-dependent operating model persists in the absence of a coherent long-term strategy to enhance the economy’s productive capacity.
At present, nearly half of the federal budget is consumed by debt servicing, leaving limited fiscal space for development spending. To finance routine government operations, additional taxes are imposed on an already burdened population in the form of sales tax, GST and withholding taxes. As a result of these extravagant fiscal practices, Pakistan’s debt crisis has continued to worsen with each passing year.
Available data indicate that between FY2015 and FY2025, public debt surged by an astonishing 365 percent, rising from Rs17.3 trillion to over Rs80.5 trillion. During the same period, debt servicing costs increased at a pace far exceeding revenue growth, further tightening fiscal constraints.
A stark reality is that domestic debt servicing has been the single largest contributor to expenditure growth over the past three years, crowding out development spending and depriving the economy of the productive investment required for sustainable long-term growth. Despite repeated assurances of commitment to the FRDL Act, the government has made little tangible progress toward fiscal consolidation or deficit reduction. Revenue targets are consistently missed, while no credible plans have been introduced to rein in current expenditure.
Instead, the authorities have relied on temporary measures such as extending debt maturities through increased issuance of medium- and long-term instruments. Such steps merely postpone the problem rather than resolving it. The debt trap cannot be broken as long as the government continues to live beyond its means and fails to generate sufficient revenue.
Without addressing this fundamental imbalance, debt management will only delay an eventual fiscal reckoning rather than placing public finances on a sustainable footing. The prevailing culture of unchecked spending, budget overruns by government departments, prioritisation of consumption over productive investment, and continued expansion of an already top- and middle-heavy bureaucracy lies at the heart of the problem.
Unless this flawed model is abandoned, the government will remain trapped in a cycle of borrowing to sustain an unsustainable system. The only viable solution to Pakistan’s debt dilemma lies in adopting decisive measures to reduce current expenditure, thereby freeing up resources to strengthen and expand the productive capacity of the economy and fully exploit its vast export potential.