Pakistan's interest payments on domestic and external debt are expected to stay high over the medium term, consuming a large share of government resources and pressuring the fiscal framework.

Payments have already outpaced both defence and development spending, adding strain as the debt burden grows.

According to a report, interest payments are forecast to hit Rs. 8.054 trillion in the current fiscal year, with a slight rise possible after the State Bank of Pakistan raised the policy rate by 50 basis points to 12 percent from 11.5 percent.

The government has highlighted debt acquisition, especially from foreign lenders, as an achievement, yet the rising cost of servicing that debt poses serious risks to the fiscal framework, despite claims that the debt-to-GDP ratio is falling.

Interest Payments Leave Limited Federal Resources

Debt servicing has taken a large share of tax and non-tax revenues. After the provinces receive their share under the National Finance Commission Award, the federal government is left with limited funds for its obligations.

In earlier years the centre would slip into a deficit after interest payments, but since the last fiscal year the federal government has net revenue receipts of about Rs. 3 trillion after debt servicing.

The federal fiscal deficit has stayed around Rs. 7 trillion, while the consolidated deficit could be reduced to just over Rs. 5 trillion only if provinces generate annual revenue surpluses of Rs. 1.5 trillion to Rs. 2 trillion.

Officials called the arrangement an ad hoc measure that does not offer a sustainable solution. The federal government has also borrowed more than Rs. 1.035 trillion by invoking Article 164 of the 1973 Constitution.

IMF Projects Interest Bill Above Rs. 10 Trillion

The Ministry of Finance projects interest payments could reach Rs. 8.68 trillion by FY2029.

The International Monetary Fund expects the interest bill to exceed Rs. 10 trillion by FY2031.

The IMF's projections are:

  • FY2026-27: Rs. 7.284 trillion
  • FY2027-28: Rs. 8.273 trillion
  • FY2028-29: Rs. 8.681 trillion
  • FY2029-30: Rs. 9.365 trillion
  • FY2030-31: Rs. 10.322 trillion

"The debt servicing pressure will remain elevated over the medium term," official sources said.

Fiscal Deficit to Remain Elevated

The federal fiscal deficit is projected at Rs. 7 trillion, or 4.9 percent of GDP, in the current fiscal year.

It is expected to reach Rs. 7.1 trillion, or 4.5 percent of GDP, in FY2027-28, before rising to Rs. 7.5 trillion, or 4.2 percent of GDP, in FY2028-29.

These forecasts highlight the ongoing pressure debt servicing will place on the federal budget, limiting space for other spending priorities.