6 Shocking Reasons Why Pakistan’s 13 Percent Debt Increase in FY 2025 Matters

Reasons behind Pakistan 13 percent debt increase in FY 2025 have become a central topic in South Asia’s financial discussions. The country’s total debt has surged by nearly PKR 9.6 trillion during the fiscal year, raising concerns about its long-term economic stability.

• Pakistan’s debt rose 13% due to currency depreciation, interest costs, and fiscal deficit.
• External loans from IMF and China added further pressure.
• Rising inflation and limited exports worsened repayment capacity.

Quick Context

Pakistan 13 percent debt increase in FY 2025 total public debt reached an estimated PKR 82 trillion by the end of FY 2025, according to official finance ministry reports. This includes both domestic debt (PKR 54 trillion) and external debt (PKR 28 trillion), reflecting a sharp 13% increase over the previous fiscal year.

The rise has alarmed financial analysts and international lenders, who view it as a warning sign for the country’s fragile fiscal health.

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Latest Update: Breakdown of the 13% Debt Spike

Pakistan’s Ministry of Finance, in its FY 2025 debt report, confirmed that the total debt-to-GDP ratio now stands at 79%, well above the 60% limit set by the Fiscal Responsibility and Debt Limitation Act.

Key Debt Growth Figures (FY 2025):

The report attributes the increase primarily to rupee depreciation, higher interest obligations, and continued fiscal borrowing for budgetary support.

1. Currency Depreciation and Exchange Rate Volatility

One of the main reasons behind Pakistan 13 percent debt increase in FY 2025 is the sharp decline of the Pakistani rupee (PKR), which fell nearly 16% against the U.S. dollar.

Since a significant portion of Pakistan’s debt is denominated in foreign currencies, any depreciation directly inflates the external debt burden in rupee terms.

Example:
If the rupee weakens from 280 to 325 per USD, every billion dollars of foreign debt increases by approximately PKR 45 billion.

This currency pressure stems from high import bills, delayed IMF disbursements, and dwindling foreign reserves that fell below USD 7 billion mid-year.

2. High Domestic Interest Payments

Domestic borrowing has surged as the government relied on local banks to fund its budget deficit. With policy interest rates hovering around 22%, Pakistan faces record-high interest servicing costs, consuming nearly 57% of total tax revenue.

This unsustainable debt servicing pattern has left limited fiscal space for development spending.

Debt Servicing Snapshot (FY 2025):

• Interest on Domestic Debt: PKR 6.3 trillion
• Interest on External Debt: PKR 1.8 trillion
• Total Debt Servicing: PKR 8.1 trillion

Economists have termed this a “debt trap loop,” where new loans are primarily used to pay old interest obligations.

3. Fiscal Deficit and Weak Revenue Collection

Another critical factor behind the 13% rise in Pakistan debt is the persistent fiscal deficit, projected at 7.2% of GDP. Despite revenue growth through the Federal Board of Revenue (FBR), tax collection remains below expectations, primarily due to exemptions and poor compliance.

FBR Collection (FY 2025): PKR 9.6 trillion
Expenditure: PKR 15.8 trillion

To bridge the gap, the government continued borrowing heavily from domestic markets and external institutions, compounding the debt pressure.

4. External Borrowing and IMF Conditions

Pakistan 13 percent debt increase in FY 2025 signed a USD 6 billion Extended Fund Facility (EFF) with the International Monetary Fund (IMF). However, disbursements were conditional on structural reforms and austerity measures.

To maintain currency stability and import financing, Pakistan also tapped into bilateral credit lines from China, Saudi Arabia, and the UAE — most of which came with high-interest or short-term repayment obligations.

These loans increased external debt while offering only temporary relief.

5. Inflation and Energy Subsidy Burden

Inflation averaged 22.8% in FY 2025, driven by food, fuel, and utility prices. To shield citizens from price shocks, the government reinstated energy subsidies worth PKR 750 billion.

Although politically popular, this decision widened the fiscal deficit and forced higher borrowing to finance the subsidy gap.

The interplay of high inflation and subsidy spending limited the government’s capacity to reduce existing debt, worsening the debt-to-GDP ratio.

Why Pakistan 13 percent debt increase in FY 2025 Matters

The reasons behind Pakistan 13 percent debt increase in FY 2025 reveal deep structural weaknesses in the country’s fiscal management. A higher debt ratio limits economic flexibility, restricts development spending, and erodes investor confidence.

Implications:

1. Limited Growth Potential: High debt servicing costs divert funds from infrastructure and education.
2. Currency Instability: Rising debt increases pressure on the rupee and reserves.
3. Investor Reluctance: Ratings agencies like Fitch and Moody’s could downgrade Pakistan further.
4. Inflationary Risks: Excessive borrowing increases money supply, worsening inflation.

Expert Opinions

Dr. Ishrat Husain, former governor of the State Bank of Pakistan, noted:

“Pakistan debt issue isn’t about size—it’s about structure. Over 70% of borrowing goes into consumption, not productivity. Until that changes, debt will keep rising.”

IMF’s Pakistan Mission Report (2025) observed that “fiscal slippages, rupee volatility, and weak tax compliance continue to undermine stabilization efforts.”

Meanwhile, local economists warn that without export diversification and energy reform, Pakistan may face another debt restructuring scenario by 2026.

Practical Takeaways

1. Fiscal Reform Is Urgent: Introduce targeted spending cuts and expand the tax base to reduce dependency on debt.
2. Export Competitiveness: Diversify beyond textiles to reduce external payment pressures.
3. Monetary Discipline: Stabilize the rupee through stricter foreign exchange management.
4. Debt Transparency: Publish quarterly debt reports to strengthen investor trust.

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FAQs about Pakistan 13 percent debt increase in FY

Q1: What are the main reasons behind Pakistan 13 percent debt increase in FY 2025?

Currency depreciation, high interest payments, fiscal deficits, and external borrowing drove the rise.

Q2: How much is Pakistan’s total public debt now?

As of June, Pakistan 13 percent debt increase in FY 2025 reached approximately PKR 82 trillion.

Q3: How does rupee depreciation affect debt?

It increases the cost of repaying foreign-denominated loans, inflating total debt in rupee terms.

Q4: What steps can Pakistan take to reduce its debt burden?

Boost exports, rationalize subsidies, improve tax compliance, and reduce non-development spending.

Key Takeaways : Pakistan 13 percent debt increase in FY 2025

• Reasons behind Pakistan 13 percent debt increase in FY 2025 include rupee depreciation, high interest payments, and weak fiscal discipline.
• The total debt now equals 79% of GDP, exceeding safe thresholds.
• Without reforms, Pakistan risks long-term financial instability and reduced growth.

Conclusion : Pakistan 13 percent debt increase in FY 2025

The reasons behind Pakistan 13 percent debt increase in FY 2025 highlight an urgent need for structural reforms. Sustainable economic recovery will depend on disciplined fiscal management, productive borrowing, and policy transparency. Without these, Pakistan’s debt spiral may deepen in the coming fiscal years