Pakistan’s fiscal blueprint for 2025-26 starkly reflects a persistent and deepening challenge: the spiraling cost of debt servicing. Nearly 47% of the federal budget, a staggering Rs8.21 trillion out of Rs17.57 trillion, is allocated to paying off interest and principal on public debt. This unprecedented allocation not only underscores the gravity of Pakistan’s debt predicament but also poses a significant constraint on spending in critical development sectors such as education, health, and infrastructure.
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The Rising Burden of Debt Servicing
Pakistan’s total public debt reached Rs76 trillion (US$269 billion) by March 2024, with domestic debt at Rs51.52 trillion and external debt at Rs24.49 trillion, according to the Ministry of Finance. This equates to 66.27% of the country’s GDP, surpassing the ceiling stipulated by the Fiscal Responsibility and Debt Limitation Act, which mandates public debt to remain below 60% of GDP. The breakdown of debt servicing in the 2025–26 budget paints a concerning picture.Â
Domestic interest payments alone are projected at Rs7.197 trillion, while external debt servicing is budgeted at Rs1.009 trillion. This compares to a mere 28% of the federal budget being spent on debt servicing in FY 2009–10, highlighting a dangerous long-term trajectory where nearly half of every rupee collected is funneled towards past borrowings. This expanding commitment to debt payments significantly crowds out development financing, making it harder for the state to invest in the sectors that foster economic growth and human capital.
IMF Oversight and Fiscal Restraint
Pakistan’s fiscal policy for FY 2025-26 is tightly aligned with conditions set by the International Monetary Fund (IMF), which approved a 37-month Extended Fund Facility (EFF) in September 2024. This program, designed to stabilize Pakistan’s fragile macroeconomic fundamentals, focuses on structural reforms, rebuilding foreign exchange reserves, and restoring fiscal sustainability.
Under IMF oversight, the government is required to maintain a primary fiscal surplus (excluding interest payments), target higher tax revenues, and reduce non-priority expenditures, especially untargeted subsidies. These constraints, while essential for long-term sustainability, significantly limit the government’s policy space for growth-oriented spending. The IMF’s insistence on fiscal discipline is visible in the current budget’s lean Public Sector Development Program (PSDP), where the government has made a conscious retreat from development spending to meet debt obligations.
Impacts: Shrinking Development Space
In FY 2025–26, the PSDP’s allocation has shrunk to just 5.69% of the total budget, down dramatically from 27.5% in 2009-10. This decline reflects not only the rising debt burden but also the fiscal consolidation measures imposed under the IMF program. The consequences of underfunding development are profound. Education, healthcare, and infrastructure critical to improving human capital, job creation, and long-term productivity are being sidelined. A lack of investment in these sectors risks deepening poverty, worsening social inequalities, and delaying Pakistan’s journey toward sustainable economic development. According to a 2024 World Bank report, Pakistan already lags behind regional peers in human development indicators, and continued underinvestment may further erode progress.
Government’s Strategy: Navigating the Issue
To address this fiscal conundrum, the government has adopted a multi-pronged strategy aimed at managing debt pressures without derailing economic recovery:
1. Fiscal Consolidation
The government is targeting a primary surplus of 2% of GDP, already achieved in the first half of FY25. By limiting fresh borrowing and maintaining expenditure controls, the aim is to stabilize debt accumulation.
2. Revenue Mobilization
Efforts to broaden the tax base, digitize revenue collection, and reduce leakages are underway. The Federal Board of Revenue (FBR) is under pressure to meet ambitious targets through improved compliance and documentation of the informal economy.
3. Expenditure Rationalization
The government is focusing on cutting back non-development expenditures, including blanket subsidies and unproductive spending. Energy sector reforms are also part of this agenda to limit circular debt accumulation.
4. Debt Management
There are active attempts to lengthen the maturity profile of domestic debt and restructure external liabilities where possible. These steps aim to reduce rollover risk and ease liquidity pressures in the medium term.
5. External Financing
Pakistan faces a gross external financing need of $19.3 billion in FY 2025-26, of which $17 billion is expected to be met through new loans and rollovers, leaving a financing gap of $2.4 billion. Islamabad is lobbying multilateral and bilateral partners; including China, Saudi Arabia, and the UAE, to secure bridge financing. However, traditional credit sources like World Bank budget support and Saudi oil facilities have been scaled back, adding to the challenge.
Risks on the Horizon
Despite a clear fiscal roadmap, serious risks persist:
- Geopolitical tensions, especially in the Middle East, may lead to oil price volatility, impacting Pakistan’s import bill and inflation trajectory.
- Global monetary tightening may restrict access to commercial debt markets, increasing reliance on bilateral and multilateral lenders.
- Domestic political instability or public resistance to subsidy withdrawal could derail reform efforts.
The IMF itself, in its latest review, warned that “policy slippages, inadequate revenue efforts, and weak governance remain key risks to program success.”
How Debt Servicing is Strangling Pakistan’s DevelopmentÂ
Pakistan’s current fiscal trajectory reflects a troubling paradox: the pursuit of macroeconomic stability is coming at the cost of long-term national development. The state’s obligation to service debt has eclipsed its capacity to invest in the future. When nearly half of a national budget is absorbed by past borrowings, the government isn’t allocating, it’s apologizing to creditors. This budget reflects more than just fiscal restraint; it reveals a structural rigidity that undermines democratic priorities. The overwhelming focus on meeting IMF benchmarks, primary surplus targets, subsidy cuts, and austerity, has left little room for imaginative policymaking.Â
In chasing compliance, the government risks hollowing out the state’s developmental core. The rapid decline in development spending is not just a budgetary adjustment, it’s a political choice. It signals a retreat from investment in people, in human capital, and in productive assets that could break the cycle of dependency. Instead of creating resilience, this fiscal model deepens vulnerability: it sustains solvency at the expense of social cohesion. Worse, this strategy does not buy time, it buys fragility. Austerity-induced stagnation will not produce the growth needed to outpace debt. And without structural reforms in revenue, governance, and export competitiveness, Pakistan remains locked in a low-growth, high-obligation trap.
The real danger is inertia. A nation that keeps paying off the past without building its future is not solvent, it’s stuck.
The Road Ahead: Breaking the Debt Trap
Pakistan’s ability to break the cycle of debt dependency hinges on bold reforms, political will, and prudent economic management. Debt servicing, while obligatory, should not permanently strangle the development agenda. Over time, the country must shift from borrowing for budgetary support to investing in export-led growth, industrial productivity, and human capital enhancement. Moreover, enhanced governance and accountability mechanisms are essential to ensure that every rupee saved from austerity is effectively redirected toward improving public services and infrastructure.
Conclusion
Pakistan’s 2025–26 budget is a stark illustration of the dilemma between past obligations and future aspirations. With nearly half the national budget tied up in debt servicing, fiscal space for crucial development initiatives is rapidly eroding. Under the watchful eye of the IMF, the government has little room for expansionary policies and must tread carefully between reform and relief.
Whether Pakistan can successfully navigate this high-stakes balancing act depends not only on technical fiscal management but also on sustained political commitment, external support, and a clear national development vision that gradually loosens the grip of debt and rekindles hope for sustainable, inclusive growth.
