Moody’s Investors Service has issued a stark warning on Pakistan’s mounting fiscal and economic challenges. The country is at severe liquidity risks as its local currency financing needs are now over 10% of the GDP and interest payments are likely to absorb 40% of government spending by FY2025.

These, together with deepened food insecurity and the pressure of complying with multilateral financing terms, have threatened fragile economic stability in Pakistan. According to Moody’s Investors Service, interest payments would swallow nearly 40% of Pakistan’s total government spending by FY2025, from about 25% in FY2021, indicating significant fiscal challenge. This analysis appeared in Moody’s report “2025 Outlook – Stable as Economic Risks Recede, Geopolitical and Trade Risks Persist.” It highlighted that even though Pakistan’s $7 billion IMF programme is expected to ease liquidity pressures, the conditions are severe and can raise social risks. The report said that replacing maturing sovereign debt through concessional financing alone, especially for weak economies such as Pakistan, may not be adequate. The country’s debt affordability remains weaker than pre-pandemic levels, and it is one of the most food-insecure countries in the Asia-Pacific region, along with Bangladesh and other frontier markets.

According to the State Bank of Pakistan (SBP), the country’s debt-to-GDP ratio declined to 65.7% by September 2024, wiping away the upward trend during the previous fiscal year. Central government domestic debt rose by Rs7.838 trillion in the past year to Rs47.536 trillion by end September 2024 compared with Rs39.698 trillion by end September 2023. However, within June-September 2024, domestic debt rose only by Rs376 billion. Government borrowing requirements declined in the first quarter of FY25 because of surplus liquidity provided mainly by Rs2.7 trillion profits posted by the SBP. The government avoided borrowing from treasury bills initially but later borrowed below its target, indicating attempts at debt portfolio restructuring to move more from short-term to long-term obligations. Despite these measures, lower-than-expected tax collections during the first four months of FY25 might force the government to borrow more than planned. Central government total debt, as at September 2024, stood at Rs69.6 trillion, which was a 1.1% decline or Rs792 billion less from August. Nonetheless, the economy is still weighed down by both domestic and external debts, sucking in around Rs9 trillion per year—above all taxes and taking the largest share of the budget. The low tax-to-GDP ratio could soon become a challenge for the current government as the IMF squeezes in for increased tax revenues,” warn financial experts. Simultaneously, economists caution against further tax hikes that might stifle economic growth and dampen consumption.

Moody’s highlighted significant liquidity risks for Pakistan and Zambia, which said, “Their local currency financing needs have exceeded 10% of GDP in both cases, with substantial local and foreign currency liquidity challenges likely to significantly increase the risk of defaults.” Debt affordability is expected to stay stronger than pre-pandemic levels by 2025, although advanced economies will thus differ globally. Exceptions such as the US and France are due to decline, while countries like Greece improve through deleveraging efforts.

The report further observed an increasing global military expenditure owing to the rising tensions. In Europe, several nations have been increasing defence budgets towards attempting to meet NATO’s 2% of GDP as perceived threat from Russia. Likewise, India’s defence spending is on the rise owing to the continued tensions with China and Pakistan.

Low-rated frontier markets, such as Mozambique, Rwanda and Nicaragua, will continue to run risk from extreme food insecurity, as well as Pakistan. Global food prices are likely to stay lower than recent highs. However, increased food availability through the second half of 2024, driven by the monsoon season and post-harvest recovery, has decreased people falling under acute food insecurity to 7.9 million in Pakistan, from 8 million at the beginning of this year, the Integrated Food Security Phase Classification analysis says. The first six months of 2024 marked climate shocks, which highly exacerbated food insecurity in addition to constrained access to food, livestock losses, and reduced livelihoods.

BHA under USAID provided nearly $16 million to support Pakistan’s early recovery, disaster resilience, and risk reduction initiatives. The livelihood-strengthening activities included training in livestock management, cash grants, and skill-building for women to process fruit and vegetables and increase their revenues. In addition to technical assistance, small-scale farmers were capacitated, and cash and in-kind support was given by the Agency for Technical Cooperation and Development for on-farm and off-farm livelihoods. It also allocated $5.3 million for nutrition programs during FY2024 to treat more than 25,700 individuals for acute malnutrition in Balochistan and Sindh through therapeutic food supplies and infant feeding programs, working in partnership with WHO and UNICEF.

Moody’s emphasized that alleviation of vulnerabilities in food security and rising debt costs, as well as meeting conditions for multilateral financing, are required for stabilizing the economic and social outlook in Pakistan over the coming years. The Moody’s report underscores the urgency for Pakistan to address its rising debt burden, manage liquidity pressures, and tackle food insecurity. While international aid and multilateral financing provide short-term relief, sustained progress will require comprehensive policy reforms and economic resilience-building efforts. Without these measures, Pakistan risks deeper fiscal challenges and prolonged economic instability in the coming years.