Pakistan’s debt story looks very different in October 2026 from the one that dominated economic debate five or six years ago.
The country is no longer dealing with exactly the same combination of rapidly rising debt, large fiscal deficits, falling reserves and acute external financing pressure that characterised the period around 2018-23. Fiscal consolidation has strengthened, the primary balance has moved into surplus, interest costs have fallen from their FY2025 level, reserves have recovered from their lows and the government has returned to international capital markets.
But one number explains why the country’s debt problem cannot simply be declared over. Pakistan’s total public debt increased from Rs36.4 trillion at the end of June 2020 to Rs86.7 trillion at the end of June 2026 — an increase of about Rs50.3 trillion, or roughly 138%. At the same time, however, the public-debt-to-GDP ratio fell from around 87.2% in FY2020 to 68.3% in FY2026 under the Ministry of Finance’s public-debt definition.
That apparent contradiction is at the heart of Pakistan’s debt story. The debt stock has more than doubled in rupee terms, yet the debt ratio has fallen substantially because the economy’s nominal size has expanded, while fiscal consolidation, lower interest rates and debt-management measures have slowed the pace at which new debt is being added.
The more relevant question in 2026 is therefore no longer simply whether Pakistan is borrowing. It is why the country continues to require such large volumes of borrowing and refinancing even after achieving a primary surplus and improving several of its macroeconomic indicators.
That question leads back to the same structural issues that have persisted for decades:
- a narrow tax base,
- large interest obligations,
- recurrent fiscal deficits,
- energy-sector liabilities,
- loss-making state-owned enterprises,
- weak export capacity
- and a financing model in which a significant portion of new borrowing is required simply to refinance maturing debt.
The numbers have changed. The underlying financing challenge has not disappeared.
From Rs36 trillion to Rs86.7 trillion
When Pakistan’s debt situation was being discussed in 2020 and early 2021, the country was emerging from another difficult period. According to the Ministry of Finance’s “Annual Debt Review” for FY2020, total public debt stood at approximately Rs36.4 trillion at the end of June 2020, equivalent to about 87.2% of GDP. Domestic debt was around Rs23.3 trillion while external public debt stood at approximately Rs13.1 trillion.
Six years later, the corresponding figures are dramatically larger. At the end of FY2026, total public debt had reached Rs86.715 trillion, comprising approximately Rs59.441 trillion of domestic debt and Rs27.274 trillion of external public debt.
Yet the public-debt-to-GDP ratio had declined to 68.3%, from 70.6% a year earlier. Under the narrower definition prescribed by the “Fiscal Responsibility and Debt Limitation Act”, total government debt stood at Rs77.168 trillion, or 60.8% of GDP.
This distinction matters. Debt figures in Pakistan are frequently quoted without specifying the definition being used. The Ministry of Finance’s total public-debt measure and the IMF’s general-government debt measure are not identical. Different methodologies can therefore produce different debt-to-GDP ratios without necessarily contradicting one another.
For a six-year comparison, however, the Ministry of Finance’s public-debt series provides a useful picture of how dramatically the nominal debt stock has expanded.
Pakistan’s debt in six years
| Indicator | FY2020 | FY2026 |
| Total public debt | Rs36.4trn | Rs86.7trn |
| Domestic public debt | Rs23.3trn | Rs59.4trn |
| External public debt | Rs13.1trn | Rs27.3trn |
| Public debt/GDP | 87.2% | 68.3% |
| FY2026 federal interest expense | — | Rs6.95trn |
| FY2027 budgeted interest payments | — | Rs8.05trn |
The increase in debt therefore cannot be dismissed as merely an accounting issue. Pakistan genuinely owes substantially more money today than it did in 2020. What has improved is the relationship between that debt and the size of the economy, as well as the pace at which debt is accumulating.
The crucial change: debt growth has slowed
The most important change in the past two years is not that Pakistan stopped borrowing. It is that the rate of debt accumulation slowed sharply.
The Ministry of Finance reported that total public debt increased by 13% in FY2024 and FY2025, compared with annual growth rates of approximately 23% in FY2022 and 28% in FY2023. In FY2026, public debt growth slowed further to 7.7%, taking the stock to Rs86.7 trillion.
That change is significant because debt sustainability depends not simply on the absolute amount of debt, but also on the relationship between debt growth, nominal economic growth, interest costs and the government’s primary fiscal balance.
Pakistan recorded a federal primary surplus of Rs2.185 trillion in FY2026. This means that before accounting for interest payments, the federal government’s revenues exceeded its non-interest expenditure. But interest payments remained large enough to turn that primary surplus into an overall federal fiscal deficit of Rs4.763 trillion.
The federal fiscal deficit nevertheless fell from Rs7.089 trillion in FY2025, while the overall fiscal deficit was approximately 3.8% of GDP. This is perhaps the clearest explanation of Pakistan’s debt problem in one set of numbers. The government can generate a primary surplus and still require substantial borrowing because the accumulated debt itself produces a huge interest bill.
The interest bill remains the elephant in the room
Pakistan’s debt-management problem is not simply the amount owed. It is the annual cost of carrying that debt.
Federal interest expenditure fell by 22% to Rs6.948 trillion in FY2026, from Rs8.887 trillion in FY2025. The decline reflects lower interest rates, debt-management operations and fiscal consolidation. But the improvement does not mean interest payments have become a minor budget item.
Under the FY2026-27 federal budget, Pakistan has allocated Rs8.054 trillion for interest payments.
- That is almost 46% of the Rs17.495 trillion current expenditure budget.
- It is also more than eight times the Rs1 trillion Federal PSDP allocation.
- Interest payments are more than twice the Rs3 trillion defence allocation, and almost seven times the federal development programme.
The comparison illustrates the fiscal trade-off created by accumulated debt. A government can increase development spending only after meeting large fixed obligations. And because interest payments are contractual obligations, reducing them quickly is difficult. This is why a reduction in the debt-to-GDP ratio does not automatically translate into a large expansion in fiscal space.
Borrowing to repay borrowing: what the numbers actually mean
The phrase “borrowing to repay borrowing” is often used to describe Pakistan’s debt cycle. There is an element of truth in it, but the mechanics are more complicated.
Governments routinely refinance maturing debt. A treasury bill that matures is paid and replaced with another borrowing instrument. A bond reaching maturity can be refinanced through a new bond. External loans also have scheduled principal repayments that have to be financed. Consequently, gross borrowing figures can look enormous even when net new borrowing is considerably smaller.
In FY2026, Pakistan’s gross domestic financing was approximately Rs33 trillion, while domestic repayments were around Rs28.3 trillion, leaving net domestic financing of roughly Rs3.6 trillion. On the external side, gross financing was approximately Rs3.8 trillion, against repayments of about Rs2.6 trillion, producing net external financing of around Rs1.2 trillion.
The distinction is important. Pakistan is not adding the full amount of its gross borrowing to its debt stock as fresh expenditure. A substantial portion is refinancing existing obligations.
But refinancing itself creates vulnerability. If interest rates rise, if external financing becomes unavailable or if reserves fall sharply, refinancing becomes more expensive and more difficult. That is why debt sustainability is also a liquidity question.
Domestic debt has become the dominant problem
The composition of Pakistan’s debt has changed significantly. At the end of FY2026, domestic debt accounted for approximately Rs59.4 trillion, or nearly 69% of total public debt. Domestic debt increased by around 9% during FY2026.
- Treasury bills rose by approximately 25% to Rs10.9 trillion.
- Sukuk and Bai-Muajjal instruments increased by around 35% to Rs8.6 trillion.
- Pakistan’s domestic debt portfolio also includes approximately Rs35.3 trillion in Pakistan Investment Bonds and Rs3.7 trillion in unfunded debt.
The banking system remains central to this financing model. Approximately 70% of tradable domestic government securities are held by scheduled banks, while the State Bank holds around 5% and non-bank investors approximately 17%.
This creates another policy issue. When banks allocate a very large share of their balance sheets to government securities, less financing may be available for private-sector credit and productive investment. The government obtains predictable financing. The private sector competes for the remaining financial resources. The issue is therefore not simply the size of government borrowing but its effect on the allocation of domestic savings.
External debt: smaller share, continuing vulnerability
Pakistan’s external public debt was approximately $98.1 billion at the end of June 2026, equivalent to around Rs27.3 trillion at the prevailing exchange rate.
Multilateral institutions accounted for the largest component at approximately $44.6 billion, followed by bilateral creditors, bilateral deposits, Eurobonds and Sukuk, commercial loans and IMF obligations. IMF-related debt stood at around $11.1 billion.
The Ministry of Finance says the external share of total public debt fell from 34% to approximately 32% in FY2025 and remained around that level in FY2026. The shorter-term component of external public debt also declined, with the short-term share falling from 24% to 16%. The remaining 84% was medium- and long-term debt.
That shift reduces immediate rollover pressure. But Pakistan remains exposed to foreign-exchange risk because external obligations must ultimately be serviced in foreign currency.
The World Bank’s broader external-debt dataset, which covers external debt beyond the government’s public-debt definition, puts Pakistan’s external debt stock at 35.6% of GNI in 2024. More importantly, external debt service amounted to 39.5% of exports of goods, services and primary income in 2024, while interest payments alone represented 13.3% of exports.
These are not 2026 debt-stock figures, but they demonstrate the foreign-exchange burden associated with Pakistan’s external liabilities. The World Bank’s May 2026 assessment continues to classify Pakistan as having a high risk of external debt distress under its debt-sustainability framework.
That does not mean default is inevitable. It means the country’s external financing position remains vulnerable enough to require careful management.
IMF: from emergency financing to a recurring policy framework
The IMF has been part of Pakistan’s economic story for decades. Pakistan entered its first IMF arrangement in 1958 and has subsequently returned to the Fund through multiple programmes. The official IMF lending history records commitments across successive arrangements going back to the 1950s.
The 2021 debt debate was dominated by the question of how frequently Pakistan had returned to the IMF. By 2026, the more relevant question is what the programmes are attempting to change.
The current 37-month “Extended Fund Facility” worth about $7 billion was approved in September 2024. In May 2025, Pakistan also obtained a 28-month “Resilience and Sustainability Facility”, providing approximately $1.4 billion in additional financing linked to climate and resilience reforms.
Following the IMF’s third EFF review and second RSF review in May 2026, Pakistan received approximately $1.1 billion under the EFF and $220 million under the RSF, taking total disbursements under the two arrangements to approximately $4.8 billion.
The current programme is broader than a simple balance-of-payments loan. The IMF’s stated reform priorities include:
- broadening the tax base,
- strengthening public finances,
- improving competition and productivity,
- reforming state-owned enterprises,
- improving energy-sector viability,
- rebuilding foreign-exchange reserves
- and strengthening social protection.
In other words, the IMF programme is attempting to address some of the same structural weaknesses that repeatedly create Pakistan’s financing gaps.
The tax problem has improved — but remains structural
One of the central arguments in Pakistan’s debt debate has always been that the country collects too little tax relative to the size of its economy. There has been measurable improvement. The IMF reported that general-government tax revenue, including provincial taxes and the petroleum development levy, reached 12.3% of GDP in FY2025, the highest level in its historical series going back to at least 2000.
But the IMF also noted that Pakistan’s tax-to-GDP ratio remains below that of comparable countries. The distinction between improvement and adequacy is important. A higher tax-to-GDP ratio gives the government greater capacity to finance expenditure without borrowing. But if tax collection remains insufficient to finance the government’s recurring obligations, debt accumulation can continue even after substantial tax reforms.
The FY2026-27 budget targets Rs15.264 trillion in FBR tax revenue, with total federal gross revenue receipts projected at Rs20.6 trillion. After the provincial share, federal net revenue receipts are projected at approximately Rs11.75 trillion. Against that, the federal government has budgeted Rs8.054 trillion merely for interest payments.
That comparison captures the scale of the problem. A large share of the government’s fiscal capacity is effectively pre-committed before new development priorities are considered.
The SOE problem has not disappeared
Another source of recurring fiscal pressure is Pakistan’s state-owned enterprise sector. The issue is not that every SOE is loss-making. Several major public enterprises generate substantial profits. But the aggregate picture remains difficult.
According to the government’s SOE reporting, profit-making SOEs generated approximately Rs709.9 billion in FY2025, compared with Rs820.7 billion a year earlier. Loss-making SOEs, meanwhile, recorded losses of approximately Rs832.8 billion, compared with Rs851.4 billion in FY2024. After adjustments, the SOE sector recorded a net loss of approximately Rs122.9 billion in FY2025, compared with Rs30.6 billion a year earlier.
The aggregate liabilities of the SOE sector stood at roughly Rs31.7 trillion, against assets of about Rs38 trillion.
The numbers explain why SOE reform remains part of the IMF programme. A loss-making public enterprise does not automatically translate into an equivalent increase in sovereign debt. But recurring government support, guarantees, accumulated arrears and fiscal transfers can ultimately create pressure on the public finances.
Energy remains another debt channel
Pakistan’s energy sector is closely connected to the country’s debt problem. The electricity system has historically accumulated payment arrears because tariffs, subsidies, losses, collection performance and generation costs do not always align.
The result is the phenomenon commonly known as “circular debt”.
The IMF continues to identify energy-sector viability as a macroeconomic priority, with reforms aimed at cost recovery, tariff adjustments, reducing system losses and preventing the recurrence of circular-debt accumulation. This is important because fiscal consolidation can be undermined if liabilities are simply shifted outside the conventional budget. A government can reduce the headline fiscal deficit while arrears accumulate elsewhere in the energy chain. Debt management therefore cannot be separated from the financial health of the power sector.
Debt management has changed
There are also important developments that distinguish 2026 from the Pakistan of 2020-23. The government has become more active in managing the structure of its liabilities rather than simply raising new money.
During FY2026, Pakistan conducted government debt buybacks worth approximately Rs2.924 trillion. The government had also retired approximately Rs2.1 trillion of debt owed to the State Bank during FY2025 and the first half of FY2026, while buying back government securities.
The domestic debt maturity profile has also been lengthened. The average time to maturity of domestic debt was approximately 3.82 years at the end of FY2026, while the corresponding external debt maturity was approximately 6.1 years. Longer maturities reduce rollover pressure.
Pakistan also returned to international capital markets during FY2026, raising $750 million through a Eurobond in April 2026 and issuing approximately CNY1.75 billion through a Panda bond in May 2026. Market access matters because a country dependent exclusively on domestic banks or bilateral and multilateral lenders has fewer financing options. But market access is not free money. Commercial borrowing generally carries higher costs than concessional financing, and international investors can demand significantly higher yields when they perceive greater sovereign risk.
The denominator matters — but it cannot tell the whole story
One of the biggest misunderstandings in Pakistan’s debt debate is the assumption that a falling debt-to-GDP ratio automatically means the debt problem has been solved.
The ratio has indeed improved. Public debt fell from 87.2% of GDP in FY2020 to 68.3% in FY2026 under the Ministry of Finance’s measure. But nominal GDP has also expanded significantly. Pakistan’s nominal GDP reached approximately Rs126.9 trillion in FY2026, while real GDP growth was around 3.7% and inflation averaged approximately 7.1%.
Inflation increases the nominal value of economic output and therefore increases the denominator used in debt-to-GDP calculations. This does not make the reduction in the ratio meaningless. It simply means the ratio must be interpreted alongside the actual debt stock, interest bill, primary balance, economic growth and foreign-exchange capacity. A country can have a declining debt-to-GDP ratio and still face serious refinancing pressure.
What happened to the original debt trap?
The expression “debt trap” is often used loosely. In this article, it is better understood as a cycle in which a government repeatedly runs fiscal or external financing gaps, borrows to finance those gaps, and then has to borrow again to refinance maturing obligations and service the accumulated debt.
Pakistan has clearly not escaped the need for borrowing. But the nature of the problem has changed. In 2022 and 2023, the country experienced exceptionally high debt growth, severe external financing pressure, falling reserves and significant exchange-rate volatility.
By FY2026, the picture was different:
- The government had achieved a primary surplus.
- Debt growth had slowed to 7.7%.
- The debt-to-GDP ratio had declined.
- Interest expenditure had fallen by 22%.
- The external share of public debt had been reduced.
- The maturity profile had improved.
- The country had returned to international capital markets.
- Foreign-exchange reserves had recovered substantially from the levels reached during the 2022-23 crisis period.
- And the IMF programme remained operational.
These are measurable changes. But they do not remove the structural need for financing.
The real test is whether primary surpluses can become permanent
Pakistan’s FY2026 primary surplus is important because it changes the basic arithmetic of debt accumulation. If a government consistently generates primary surpluses large enough to cover a significant part of interest costs, debt dynamics become easier to manage.
But maintaining such surpluses over many years is politically and economically difficult. A primary surplus means that the government is collecting more revenue than it spends before interest. It does not mean that the government has enough money to repay the existing debt.
Pakistan still had to pay nearly Rs7 trillion in interest during FY2026. And it has budgeted Rs8.054 trillion for interest in FY2027. The question is therefore whether the primary surplus can be maintained while the economy grows fast enough to reduce the debt burden without suppressing investment and social spending. That is a considerably harder challenge than producing one year’s surplus.
The growth problem
Debt sustainability ultimately depends on growth. If nominal GDP grows faster than the effective interest cost on public debt, and the government maintains an appropriate primary balance, the debt ratio can decline. But if growth remains weak while interest rates and debt-servicing costs remain high, fiscal consolidation becomes much harder.
Pakistan’s real GDP growth was approximately 3.7% in FY2026. That is an improvement over the previous year, but it does not by itself solve the country’s long-term growth problem. The country needs higher productivity, investment, exports and private-sector expansion to generate the foreign exchange and tax revenues required to support a larger economy.
This is also why the IMF’s current programme places considerable emphasis on competition, productivity, human capital, private-sector activity and energy-sector reform rather than treating the financing problem purely as a question of government borrowing.
The export constraint
Pakistan’s debt problem is also an export problem. A government can borrow in rupees to finance domestic expenditure, but external debt ultimately requires foreign currency. That foreign currency comes primarily from exports, remittances, foreign investment and external financing.
The World Bank’s 2024 data show Pakistan’s exports of goods, services and primary income at approximately $41.2 billion, while external debt service was equivalent to 39.5% of those exports. This is why increasing exports matters even if the fiscal deficit is reduced.
Without a larger and more diversified foreign-exchange earning capacity, Pakistan remains vulnerable to periods in which imports rise faster than exports and external financing becomes difficult to obtain. The country can stabilise the current account temporarily by restricting imports. But sustainable debt management ultimately requires the economy to generate more foreign exchange through productive activity.
The 2026 budget shows the constraint clearly
The FY2026-27 federal budget provides perhaps the clearest snapshot of the challenge:
- Total expenditure is budgeted at Rs18.771 trillion.
- Current expenditure accounts for Rs17.495 trillion.
- Interest payments consume Rs8.054 trillion.
- Defence receives Rs3 trillion.
- Pensions account for Rs1.169 trillion.
- Subsidies are budgeted at Rs1.091 trillion.
- The Federal PSDP is only Rs1 trillion.
These figures show why debt servicing is not an abstract macroeconomic statistic. Every rupee allocated to interest is a rupee that cannot simultaneously be spent on another federal priority. The government can reduce this burden only gradually because the debt stock itself has accumulated over many years.
From the “begging bowl” debate to debt arithmetic
The political language surrounding Pakistan’s debt has changed repeatedly. Governments have blamed inherited debt. Oppositions have blamed excessive borrowing. Economists have pointed to taxation, energy losses, low exports and structural fiscal imbalances.
The numbers, however, tell a more complicated story. Pakistan’s debt did not begin with one government and it has not been created by one fiscal decision. The country has repeatedly borrowed because its expenditure requirements, external financing needs and development ambitions have exceeded its sustainable domestic resource base. That pattern has survived changes in governments and economic policy.
The more useful question in 2026 is therefore not which government created the debt. It is whether Pakistan can change the arithmetic that repeatedly creates the need for debt.
A six-year balance sheet
The transformation between 2020 and 2026 can be summarised in a few numbers.
- Public debt: Rs36.4 trillion → Rs86.7 trillion.
- Domestic debt: Rs23.3 trillion → Rs59.4 trillion.
- External public debt: Rs13.1 trillion → Rs27.3 trillion.
- Public debt-to-GDP: 87.2% → 68.3%.
- FY2026 interest expense: Rs6.95 trillion, down 22% year-on-year.
- FY2026 primary surplus: Rs2.185 trillion.
- FY2026 federal fiscal deficit: Rs4.763 trillion.
- FY2027 budgeted interest: Rs8.054 trillion.
- FY2027 Federal PSDP: Rs1 trillion.
- FY2025 SOE net adjusted loss: Rs122.9 billion.
- World Bank external debt service ratio: 39.5% of exports in 2024.
- Current IMF EFF: approximately $7 billion.
- Current IMF EFF + RSF disbursements by May 2026: approximately $4.8 billion.
These figures do not describe an economy that is in exactly the same position as it was in 2020 or 2023. But they also do not describe an economy that has eliminated its debt problem.
So, has Pakistan escaped the debt trap?
The answer depends on what is meant by “debt trap”. If the term means an economy in which debt is growing uncontrollably relative to GDP, the latest numbers show a significant change:
- Debt growth has slowed.
- The debt-to-GDP ratio has fallen.
- The government has generated a primary surplus.
- Interest costs declined sharply in FY2026.
- Debt-management operations have increased.
- The maturity profile has improved.
- External market access has returned.
Those are measurable developments. But if “debt trap” means a structural dependence on borrowing and refinancing because domestic revenue, exports and economic growth remain insufficient to comfortably finance the state’s obligations, the problem remains:
- Pakistan still has to refinance large amounts of maturing domestic debt.
- It still has to service substantial external obligations.
- It still allocates more than Rs8 trillion a year to interest under the FY2026-27 budget.
- Its tax-to-GDP ratio remains below levels seen in many comparable economies.
- Its SOE sector continues to contain significant loss-making entities.
- Its energy sector remains vulnerable to the accumulation of arrears.
- And its external debt sustainability assessment remains classified as high risk by the World Bank.
The debt trap, therefore, has not simply disappeared. It has changed form. Pakistan is no longer confronting only the question of how to stop debt from exploding. It is now confronting the more difficult question of how to reduce its reliance on borrowing while maintaining economic growth, investment and social spending.
The next phase is about changing the arithmetic
The first phase of stabilisation was about stopping the deterioration. The next phase is about making the improvement durable.
That requires several things to happen simultaneously:
- sustained primary surpluses,
- a broader tax base,
- stronger exports,
- higher private investment,
- reform of loss-making public enterprises,
- a financially viable energy sector,
- longer debt maturities
- and a sustained reduction in the cost of government borrowing.
None of these can be achieved through an IMF programme alone. Nor can they be achieved through borrowing alone. An IMF programme can provide financing and a policy framework, but the underlying economic transformation has to come from domestic institutions and the productive economy. Likewise, debt restructuring or refinancing can ease immediate pressure without necessarily solving the reasons debt accumulated in the first place.
Pakistan’s numbers in 2026 provide some evidence that the most acute phase of the recent debt crisis has eased. But they also demonstrate why the country’s debt story remains unfinished. The public debt stock has risen by more than Rs50 trillion since 2020. The debt ratio has fallen, but the interest bill remains enormous. The primary balance has improved, but the government still needs substantial gross financing to refinance existing obligations. The external financing position has stabilised, but external debt service remains a significant claim on foreign-exchange earnings. The tax take has improved, but the revenue base remains comparatively narrow. And economic growth has recovered, but not yet to a level that can by itself transform the country’s debt dynamics.
Pakistan’s challenge in 2026 is therefore no longer simply to avoid another balance-of-payments crisis. It is to make sure that every successive cycle of stabilisation does not end with another cycle of borrowing. That is the point at which the debt question moves beyond accounting. It becomes a question of whether Pakistan can finally generate enough tax revenue, exports, investment and sustained economic growth to finance the state without repeatedly returning to the same financing table.