In a recent development, Pakistan’s debt-to-GDP ratio has decreased to 65.7% as of September 2024, marking an encouraging shift after a prolonged period of escalating debt. The latest data from the State Bank of Pakistan (SBP) reflects strategic efforts to manage the national debt burden, even as domestic and external financial pressures remain high.
Debt Landscape: Domestic and External Components
Over the past year, Pakistan’s central government domestic debt saw a considerable increase, climbing from Rs39.698 trillion in September 2023 to Rs47.536 trillion by September 2024—a year-on-year rise of Rs7.838 trillion. However, in the recent quarter (June to September 2024), this debt rose modestly by only Rs376 billion, suggesting the government’s restrained borrowing strategy. This approach has been partly attributed to surplus liquidity generated from SBP profits, which amounted to a substantial Rs2.7 trillion, helping to reduce immediate borrowing needs.
Pakistan’s central government debt in September 2024 was recorded at Rs69.6 trillion, a 1.1% month-on-month decrease from Rs70.4 trillion in August. This marks a positive trend, with the debt-to-GDP ratio reaching its lowest point since June 2018. According to Arif Habib Limited’s Head of Research, Tahir Abbas, the domestic debt-to-GDP ratio stands at 43.1%, while external debt-to-GDP ratio is 22.7%.
Restructuring Strategies and Shifting Debt Obligations
Banking experts observe that the government is restructuring its debt portfolio, favoring a shift from short-term to long-term obligations. This transition to long-term borrowing is a prudent step to stabilize fiscal demands, but lower-than-expected tax revenue in the first quarter of FY25 could necessitate additional borrowing to meet budgetary requirements.
The government’s attempt to balance its debt profile reflects a broader strategy to alleviate pressure on Pakistan’s economic growth, particularly given the country’s heavy dependence on consumption, which constitutes more than 90% of the domestic economy.
Fiscal Challenges and Tax Revenue
As the debt-to-GDP ratio falls, Pakistan faces ongoing challenges in increasing its tax-to-GDP ratio to satisfy International Monetary Fund (IMF) conditions, which call for enhanced tax revenue. Financial analysts warn that increasing taxes may stifle economic growth, with heightened taxes likely to reduce consumption—a critical pillar of Pakistan’s economy. The government has set modest growth expectations for FY25, targeting between 2.5% and 3.5%, far below the levels needed for substantial economic advancement.
Future Outlook: Fiscal Responsibility Amid Economic Constraints
Reducing Pakistan’s debt-to-GDP ratio has been a priority for maintaining fiscal stability. However, the Rs9 trillion impact of debt servicing on the national budget continues to overshadow tax revenue and limit the government’s ability to stimulate economic growth. While the decrease in the debt-to-GDP ratio is a promising sign, the road ahead requires careful management of fiscal policy, tax reforms, and sustained efforts to address both domestic and external debt obligations.
As Pakistan navigates these fiscal challenges, efforts to achieve a balanced budget and effective debt management will be essential for promoting long-term economic health and stability.
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