The domestic debt of Pakistan’s central government swelled by Rs537 billion in July, reflecting the escalating expenditure of the state machinery. This increase has pushed the country further into a debt trap, with both domestic and foreign debt servicing consuming nearly all tax revenue.
Experts have been warning that heavy borrowing will be necessary due to a revenue shortfall that began at the start of the 2024-25 fiscal year. The country’s total debt climbed to Rs69.604 trillion at the end of July, up from Rs68.914 trillion in June, marking a Rs690 billion rise in just one month.
In the past year, the total domestic and external debt surged by nearly Rs8 trillion, reaching Rs69.604 trillion from Rs61.777 trillion in July 2023. The government has projected a borrowing estimate of Rs9.3 trillion for FY25 to bridge the revenue gaps needed to meet current expenditures.
The federal government borrowed a record Rs8.4 trillion from the domestic banking system in FY24 for budgetary support, with the fiscal deficit financed at an unprecedented interest rate of 22%. This has significantly overburdened the economy, with debt servicing costs in FY24 reaching Rs8.3 trillion, highlighting the deteriorating economic situation.
Recent data from the State Bank of Pakistan, released on Thursday, showed that the government’s domestic borrowing rose to Rs47.697 trillion at the end of July, up from Rs47.160 trillion in June, an increase of Rs537 billion. Over the last 12 months, domestic borrowing has surged by Rs8.681 trillion, from Rs39.016 trillion in July 2023 to Rs47.697 trillion. This substantial borrowing will compel the government to seek further loans to service the debt in FY25.
Although the interest rate has been cut by 2.5% over the past few months, with another reduction of 150 basis points expected at the State Bank’s Monetary Policy Committee meeting on September 12, the current Rs47.69 trillion domestic debt remains high enough to consume the entire tax revenue. The return on treasury bills, a key source of short-term government borrowing, has already been reduced to 16.99%.
While the decline in interest rates may reduce borrowing costs, the PMLN-led government continues to struggle with external debt repayment obligations, heavily taxing domestic stakeholders to avoid a default-like situation. This strategy has led to significant cuts in the development budget each year, causing slow economic growth and rising unemployment.
The State Bank’s record 22% interest rate in FY24 has also hindered private sector access to the banking market, with most bank funds being invested in government securities. The aggressive government borrowing is increasing debt servicing costs and squeezing fiscal space for the private sector, forcing businesses to scale back activities and await more favorable economic conditions.
