In 2025, Pakistan’s fiscal landscape is dominated by a staggering public debt, which has profound implications for the country’s policy priorities and governance. The government’s debt has surged to approximately Rs 77.89 trillion by June 2025, up from Rs 68.91 trillion in June 2024. This escalating debt burden is not just a financial statistic; it is a central factor influencing national policy decisions and governance structures.
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The Debt Dilemma: Servicing vs. Development
A significant portion of Pakistan’s federal budget is allocated to debt servicing. In the 2025–26 fiscal year, Rs 8.2 trillion has been earmarked for this purpose, accounting for nearly half of the total federal budget of Rs 17.573 trillion. This substantial allocation leaves limited fiscal space for other critical areas such as education, healthcare, and infrastructure development.
The prioritization of debt servicing over development spending reflects a governance model where financial obligations to creditors take precedence over investments in human capital and public welfare. This scenario underscores the tension between maintaining fiscal discipline to satisfy international lenders and addressing the immediate needs of the population.
IMF Programs and Policy Conditionalities
Pakistan’s engagement with international financial institutions like the International Monetary Fund (IMF) has been a recurring theme in its economic strategy. In 2025, Pakistan is under the IMF’s Extended Fund Facility (EFF), which necessitates adherence to specific fiscal and structural reforms. These include measures to broaden the tax base, reduce subsidies, and implement energy sector reforms.
While these reforms are aimed at stabilizing the economy, they often come at the cost of short-term public welfare. For instance, the government’s focus on achieving primary surpluses and controlling inflation may lead to austerity measures that affect public spending on essential services. The conditionalities attached to IMF loans, therefore, play a pivotal role in shaping policy decisions that may not always align with domestic priorities.
Debt and Governance: The Institutional Impact
The burgeoning debt has implications beyond fiscal policy; it affects the very fabric of governance institutions. The pressure to meet debt obligations can lead to the erosion of institutional capacity as resources are diverted from strengthening public institutions to servicing debt. This diversion hampers the government’s ability to implement effective policies and deliver services to the public.
Furthermore, the reliance on external borrowing can undermine sovereignty in policy-making. Decisions may be influenced more by the requirements of international creditors than by the needs and aspirations of the populace. This dynamic can lead to a governance model that is reactive rather than proactive, responding more to external pressures than to internal demands.
Debt and Policy Prioritization
The allocation of resources in Pakistan’s budget is a direct reflection of the policy priorities shaped by the debt burden. With a significant portion of the budget dedicated to debt servicing, other areas such as education, healthcare, and infrastructure development receive comparatively less attention and funding. This skewed allocation affects the quality of public services and the overall development of the country.
For example, in the 2025–26 budget, while debt servicing consumes a substantial share, sectors like education and healthcare receive limited allocations. This disparity highlights how the imperative to manage debt influences policy decisions, often at the expense of long-term development goals.
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The Circular Debt Conundrum
One of the most pressing issues exacerbated by public debt is the circular debt in the energy sector. As of mid-2025, Pakistan’s energy sector faces a circular debt exceeding Rs. 5.4 trillion. This debt cycle involves the accumulation of arrears among power producers, distributors, and the government, leading to inefficiencies and financial instability in the sector.
The government’s attempts to address this issue through borrowing, such as the $4.5 billion Islamic finance facility arranged with local banks in June 2025, aim to ease the liquidity crisis without adding to public debt. However, such measures provide only temporary relief and do not address the underlying structural issues contributing to the circular debt.
Debt Sustainability and Economic Growth
The sustainability of Pakistan’s public debt is a critical concern. Projections indicate that the debt-to-GDP ratio could reach around 60% by the end of the 2025–26 fiscal year, surpassing the limit set by the Fiscal Responsibility and Debt Limitation (FRDL) Act. This trajectory raises alarms about the long-term viability of current fiscal policies.
To achieve debt sustainability, Pakistan needs to focus on enhancing economic growth, improving tax collection, and reducing unnecessary expenditures. However, the current emphasis on debt servicing limits the government’s ability to invest in growth-promoting initiatives, creating a vicious cycle that is challenging to break.
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Conclusion: Reassessing the Debt-Driven Governance Model
Pakistan’s experience underscores the complex relationship between public debt and governance. While borrowing can provide short-term financial relief, an over-reliance on debt can constrain policy options and impede development. The current governance model, heavily influenced by debt obligations, necessitates a reevaluation to ensure that the country’s long-term development goals are not sacrificed for immediate financial stability.
Moving forward, Pakistan must explore alternative financing mechanisms, enhance domestic revenue generation, and implement structural reforms to reduce dependency on external borrowing. Only through such comprehensive strategies can Pakistan hope to achieve a balance between fiscal responsibility and sustainable development, ensuring that governance serves the interests of its citizens rather than the demands of creditors.
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