Pakistan’s economic indicators are sending mixed signals, as recent data reveals a rise in the country’s debt burden even while fiscal performance shows improvement. In a briefing to the National Assembly, Finance Minister Muhammad Aurangzeb outlined the current situation, highlighting both encouraging trends and ongoing challenges.
Rising Debt Burden Explained
Pakistan’s public debt-to-GDP ratio has increased to 70.7%, surpassing earlier expectations of 64% for the fiscal year. While this might suggest excessive borrowing at first glance, the reality is more nuanced.
A key factor behind the increase is slower-than-expected growth in nominal GDP, which was recorded at Rs113.9 trillion instead of the projected Rs124.1 trillion. Lower inflation contributed to this shortfall, as it reduced the overall monetary value of economic output. As a result, even moderate increases in debt appear larger relative to the size of the economy.
Total public debt now stands at Rs80.52 trillion, slightly higher than initial forecasts.
Stronger Fiscal Indicators
On the positive side, Pakistan has made notable progress in managing its fiscal accounts. During the first seven months of FY2026, the fiscal deficit dropped sharply to just Rs64.7 billion, equivalent to 0.05% of GDP. This is a significant improvement compared to the same period last year, when the deficit was much higher.
Additionally, the country recorded a primary surplus of Rs4.15 trillion, or 3.2% of GDP. This indicates that, excluding interest payments, government revenues are exceeding expenditures—a sign of improved fiscal discipline.
Economic Activity Shows Signs of Recovery
Economic growth has begun to stabilize, with GDP expanding by 3.71% in the first quarter of FY2026. The performance across sectors has been uneven but generally positive:
- Agriculture grew by 2.9%
- Industry showed strong expansion at 9.4%
- Services increased by 2.35%
Large-scale manufacturing also rebounded, posting growth of 5.8% during July–January, a turnaround from the contraction seen in the previous year.
Inflation Trends and Their Impact
Inflation has eased considerably, with the Consumer Price Index averaging 5.5% during July–February FY2026. This decline has provided some relief to consumers and reduced pressure on interest rates.
However, lower inflation has also had a side effect: it has slowed nominal GDP growth, which in turn has contributed to the higher debt-to-GDP ratio.
Interest Payments and Debt Growth
Interest payments for FY2025 were recorded at Rs8.89 trillion, lower than the budget estimate of Rs9.78 trillion. This reduction was supported by a decline in the policy rate set by the State Bank of Pakistan and better fiscal management.
Even so, Pakistan’s overall debt continues to grow at an average rate of around 13% over the past two years, pointing to persistent structural pressures.
Government’s Borrowing Strategy
For the upcoming months (March–May 2026), the government plans to raise Rs7.8 trillion through borrowing, while repayments are expected to total Rs5.5 trillion. The additional funds will be used to cover expenditures and maintain cash reserves.
Final borrowing amounts will depend on market conditions and the results of debt auctions.
The Road Ahead
The latest data reflects an economy that is improving in some areas but still facing significant challenges. While fiscal discipline and lower inflation are positive signs, the rising debt ratio highlights the need for stronger and sustained economic growth.
Moving forward, policymakers will need to focus on expanding the economy, increasing revenues, and carefully managing borrowing to ensure long-term stability.
Conclusion
Pakistan’s current economic position is a balancing act between progress and pressure. The country has made strides in reducing its deficit and stabilizing inflation, but the rising debt burden remains a concern.
Sustained reforms, consistent policies, and stronger growth will be essential to putting the economy on a more secure and sustainable path.