Debt Servicing Consumes Nearly Half of Pakistan’s FY26 Budget, Defence Spending Soars
Islamabad, June 12, 2025 — Pakistan’s federal budget for the fiscal year 2025–26 highlights a stark fiscal challenge: nearly 50% of total expenditures are allocated to servicing public debt, as the government also approves a significant increase in defence spending. The annual budget outlay stands at approximately PKR 17.6 to 17.9 trillion, with interest payments alone consuming about PKR 8.3–9.8 trillion—roughly half the budget—according to government and media sources .
Impact on Priorities and Deficit
- Rising debt has squeezed room for developmental spending and social services—only about 30% of the budget is left for public development, pensions, education, health, and subsidies.
- Fiscal strain has forced a defence budget increase of approximately 17–20%, reaching around PKR 2.55 trillion, as part of a total fiscal contraction elsewhere .
Background: Mounting Debt Levels
- Pakistan’s total public debt recently surpassed 67.5% of GDP, nearly three-quarters of national output, with domestic obligations accounting for two-thirds of that amount.
- Annual interest payments climbed by 43–64%, undermining fiscal flexibility and forcing deep cuts in development spending to comply with IMF targets .
Budget Details and IMF Conditions
- The FY25 budget outlined total expenditures of PKR 18.9 trillion, with PKR 9.8 trillion earmarked for interest .
- Pakistan, under an IMF programme, is aiming to contain its fiscal deficit within 5–6% of GDP and generate a primary surplus after interest payments.
Broader Economic Implications
- Analysts warn that servicing high levels of domestic debt—primarily short-term, high-interest bank borrowing—crowds out private investment and diverts funds from priority sectors .
- Pakistan’s external debt reached approximately PKR 79 trillion (~USD 79 billion) by mid‑2025, with rising domestic debt mirroring persistent fiscal deficits and inflation-induced borrowing.
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