Debt Management: Decoding Pakistan’s External Debt Burden

When most people hear the word “debt,” they flinch. Debt is considered a sign of weakness, and any country beholding it, a developing country. Cultural expression alone almost always demonizes debt. However these biases do not reflect macroeconomics at all.

Let’s get this out of our head that all debt is bad. Debt can very well serve as a strategic tool in a country’s development. The real question is not whether a nation carries debt—nearly all do—but whether that debt is thoughtfully sourced, wisely allocated, and responsibly managed.

Why Debt Isn’t Necessarily Bad

Debt becomes necessary when a country wants to finance growth beyond what tax revenues support. Whether for infrastructure, social services, or stabilising reserves, borrowing can amplify economic progress—if used prudently.

Think of tax revenue as a limited resource. Now when calculating for a person, carrying debt beyond your means may be bad, but when calculating for a sovereign nation state, it is almost imperative to carry some debt to increase your total pool of expenditure. Of course, that amount, the sweet spot, wherein the debt is helpful and not at all risky is done after long and thoughtful calculations.

For instance, during the early 2000s, Pakistan prudently utilised multilateral loans for energy sector upgrades, helping to boost growth and stabilize the economy. Many developed nations like Japan and the US carry debts exceeding their GDP, yet maintain credibility due to strong institutional frameworks and deep, trusted bond markets.

Domestic vs. External Debt

Sovereign debt falls into two categories:

• Domestic debt: Borrowed in Pakistani Rupees from local banks and markets—easier to manage, and less vulnerable to external shocks.
• External debt and liabilities: Borrowed in foreign currencies from international lenders. This article focuses exclusively on external debt, which affects foreign reserves, the exchange rate, and global investor confidence.

The Three Faces of External Borrowing

Pakistan’s external obligations come mainly in three forms:

1. Multilateral debt: Sourced from institutions like the IMF, World Bank, and Asian Development Bank (ADB)—typically concessional, long-term, and tied to developmental goals. This kind of debt often comes with developmental obligations or expectations and is almost always given at a discount.
2. Bilateral debt: Loans from sovereign countries—often concessional or tied to diplomatic relationships (Pakistan has borrowed from China, Saudi Arabia, and the UAE). These debts are strategically important to take and also to turn down. Too much of a country’s bilateral debt is bad but some is important for good diplomatic relations.
3. Commercial debt: Raised via Eurobonds, sukuks, and international banks—these are expensive, short-term, and vulnerable to global market sentiments. These are also the most volatile ones.

Commercial debt is by far the riskiest—it costs more to service and can destabilize finances during times of stress. In contrast, multilateral and bilateral loans generally come with favorable terms and predictable repayment schedules. It is also the commercial debt which mostly results in a default. The other two, can be conveniently rolled over as history has made abundantly clear.

A Ten-Year Journey: Borrowing Patterns

Pakistan is not alien to debt. A lot of the country’s early development after partition is actually owed to debt. Moreover, we have time and again salvaged all kinds of external debts to reach various developmental and security goals.

Therefore, the problem that comes with being in too much debt is also not new to Pakistan. Ever since the 1980s, the country has, in one way or another, been in some kind of external debt, often too big to pay.

Let us for simplicity, look at a snapshot of our debt profile in the last 10 years.

• June 2013: Debt stood at ~$60.9 billion.
• June 2018: Rose to ~$95 billion during the early phases of the CPEC infrastructure boom.
• March 2022, Pakistan’s external debt and liabilities stood at approximately $130.6 billion
• March 2025: Reached ~$130.45 billion—driven by economic shocks, global crises, and a surge in commercial borrowing.

It is prudent to note that the country’s external debt, despite undergoing major reform and multiple IMF programs, has not increased in the last three years, owing to diligent policy-making and good management strategies.

Source: Dawn

Why Did Debt Surge After 2018?

• Currency Depreciation: A weaker rupee inflated foreign-denominated debt in rupee terms.
• Balance of Payments Pressure: Short-term foreign borrowings were used to shore up reserves.
• Eurobonds & Sukuks: To plug fiscal gaps, Pakistan issued expensive international bonds, with double-digit yields and modest maturities.
• Global & Domestic Instability: Political upheavals and global market tightening made commercial borrowing costlier.

These were partly reactive responses by the then highly politicised nature of government—but credible reforms post-2022 (like returning to IMF for an Extended Fund Facility, greater fiscal discipline, and efforts to normalize relations with friendly creditors) have enabled Pakistan to shift toward more concessional financing.

Current Debt Structure (March 2025)

Pakistan’s external debt profile now stands as follows, based on SBP data:

• Multilateral: ~$40 billion
• Bilateral: ~$30 billion
• Commercial (Eurobonds, sukuk): ~$25 billion
• Central bank swaps/repo: ~$10 billion
• Short-term/other: ~$25.45 billion

Debt servicing obligations are hefty; FY2024–25 scheduled repayments exceed $24 billion, largely driven by short-term and commercial debt.

Why This Matters—and What Pakistan Is Doing

It’s not just the quantity but the quality of debt that counts. Recent policy actions include:

• IMF Engagement: Re-entry under the Stand-By Arrangement and the Extended Fund Facility unlocked concessional lending from multilateral partners.
• Medium-Term Debt Management Strategy: A national blueprint to reduce reliance on commercial debt and lengthen maturity profiles.
• Fiscal and Tax Reforms: Strengthening FBR’s digital invoicing, expanding tax coverage, and improving governance—all of which improve financial stability.
• Debt Restructuring: Ongoing negotiations with bilateral creditors for more lenient repayment terms.

The Road Ahead

Pakistan’s external debt, while significant, is not a death sentence. History shows debt can be a powerful ally—if employed intelligently. The last three years have laid the foundation: better institutions, improved debt composition, and an IMF-backed reform framework.

The next phase? Deploy that capital into growth-enhancing sectors—energy, highways, digital infrastructure—so the money borrowed accelerates GDP growth. Maintain fiscal discipline and avoid short-term borrowing as a stopgap. Continue attracting concessional finance and turning burdensome debts into productive investments.

In our next installment, we’ll break down the external debt repayment calendar: due dates, creditor breakdown, and strategies to manage upcoming obligations.