Pakistan Repays Remarkable $9.3 Billion in Debt Ahead of Schedule, Officials Report Improvement in Debt Position
The Pakistani government has made significant strides in its economic management, achieving a primary revenue of 2.4 percent of GDP in FY25 – a key International Monetary Fund (IMF) requirement. This milestone comes as part of the government's continued focus on debt-to-GDP reduction, early repayments, lower interest costs, and a stronger external account.
In a positive development, the federal deficit narrowed to 6.2 percent of GDP in FY25 from 7.3 percent in FY24. This reduction is a testament to the government's efforts to stabilise the economy and improve its financial position.
Pakistan's history with boom-and-bust cycles has been well-documented, with the country receiving 22 IMF bailouts since 1958. However, the current administration seems determined to break this pattern. The finance ministry stated that the debt-to-GDP ratio in Pakistan has improved over the last few years, declining from 74 percent in FY22 to 70 percent in FY25.
One of the key strategies employed by the government to improve its debt profile has been early repayments. In a first for Pakistani history, the government made early repayments worth Rs2.6 trillion ($9.3 billion) on commercial and central bank obligations. Officials framed this move as a signal that Pakistan is moving toward a more resilient debt profile.
The early repayments were made across commercial and central bank obligations, with the aim of reducing rollover pressures and generating "hundreds of billions of rupees" in interest savings. The finance ministry emphasised that the appropriate measure of sustainability is looking at debt relative to the size of the economy (debt-to-GDP ratio).
In addition to the early repayments, the government has also benefited from key inflows. These include IMF disbursements under the Extended Fund Facility and bilateral support like Saudi Arabia's oil financing facility.
Another positive development for Pakistan's economy is the $2 billion current account surplus recorded in FY25, the first in 14 years. This reduction in external financing needs is another step towards financial stability for the country.
However, it's important to note that part of the increase in external debt reflected valuation effects from currency depreciation rather than new borrowing. The country's heavy reliance on short-term borrowing and vulnerability to currency swings have long fueled concerns about its ability to refinance maturing obligations.
Pakistan remains under the close watch of the IMF and global credit ratings agencies. The finance ministry's statement was made on Tuesday, and it will be interesting to see how these developments unfold in the coming months. Debt servicing costs fell by Rs850 billion ($3 billion) in FY25 compared with budget estimates due to eased interest rates, offering some relief to the government's financial position.
Despite the challenges, the Pakistani government appears to be making progress in its efforts to stabilise the economy and improve its financial position. The average tenor of public debt rose to 4.5 years in FY25 from 4 years the year before, improving debt maturity profiles. This move away from short-term borrowing and towards longer-term financing is a positive step towards a more sustainable debt profile.
