Pakistan’s debt challenges and reforms |
AS of January 2026, Pakistan’s central government debt continues its upward trajectory amid fiscal pressures and borrowing needs.
Data from Topline Securities show both domestic and external debt rising, with domestic debt at Rs 55.9 trillion—up 11.4% year-on-year and 1.1% month-on-month—driven by long-term debt of Rs 47.12 trillion, including Rs 43.56 trillion permanent debt. Short-term obligations stand at Rs 8.78 trillion, while Naya Pakistan Certificates jumped 16.3% month-on-month to Rs 0.072 trillion. External debt rose to Rs 23.3 trillion, up 6.7% year-on-year and 0.8% month-on-month, reaching US$83.4 billion from US$82.7 billion in December 2025.
Combining domestic and external obligations, total central government debt now stands at Rs 79.3 trillion, reflecting a 10% year-on-year increase and a 1% month-on-month rise. The growth in domestic debt, particularly long-term permanent debt, is the primary contributor to overall debt expansion, while the significant month-on-month jump in Naya Pakistan Certificates indicates increased short-term borrowing activity. External debt in USD demonstrates a gradual but steady upward trend, highlighting Pakistan’s consistent foreign financing obligations. Historical trends show total debt has grown from roughly Rs 55 trillion in January 2023 to Rs 79 trillion in January 2026, with domestic borrowing outpacing external debt.
Pakistan’s rising debt highlights the need for both short-term stabilization and long-term structural reforms. In the short term, the government must focus on stabilizing its fiscal position by reducing non-essential spending and improving efficiency in public sector enterprises, which would free up resources for debt servicing. Strengthening tax administration to broaden the tax base, improve compliance and reduce exemptions will increase government revenue without raising rates. Negotiating with external creditors for longer maturities, lower interest rates or rescheduling repayments and utilizing concessional financing from multilateral institutions, can ease immediate pressures. Supporting export-oriented financing and carefully coordinating monetary policy to manage inflation can further help stabilize debt servicing costs.
Over the longer term, structural reforms are essential. Reforming state-owned enterprises, modernizing infrastructure, and reducing subsidies will ease the fiscal burden. Diversifying revenue through IT, renewable energy, high-value agriculture, and manufacturing can provide sustainable income, reducing reliance on borrowing. Strengthening exports by improving quality, branding, and logistics will earn foreign currency for debt repayments. A robust public debt management framework optimizing maturities and balancing domestic and external financing will enhance sustainability. Encouraging private investment through a better business environment and sector incentives, along with financial discipline and transparency, will boost investor confidence and gradually lower borrowing costs.
Several countries have successfully navigated out of high-debt situations, offering lessons for Pakistan. For instance, Ireland in the early 2010s combined strict fiscal consolidation with structural reforms, including banking sector recapitalization, export promotion and attracting foreign direct investment, which helped reduce debt-to-GDP ratios. South Korea in the late 1990s responded to a financial crisis with a combination of IMF-supported reforms, export-led growth and fiscal discipline, allowing the country to stabilize debt while boosting economic growth. Similarly, Chile maintained a disciplined fiscal framework and built sovereign wealth reserves during periods of commodity boom, which allowed it to manage debt sustainably during economic downturns. The common thread in all these examples is a combination of fiscal discipline, structural reforms, export competitiveness and policy consistency.
In essence, Pakistan can move out of its debt trap by combining immediate fiscal stabilization with long-term economic growth and structural reforms, taking lessons from countries that successfully reduced debt while expanding their economies. Achieving this balance between short-term stability and long-term prosperity will be critical for sustainable fiscal management and economic resilience.
—The writer is an institutional development and governance expert.