Qudsia Bano

Pakistan’s lack of structured interest rate and yield curve forecasting models has significantly weakened its fiscal management, budget credibility, and debt sustainability, according to an official analysis available with Wealth Pakistan. The report warns that the government’s continued reliance on ad hoc or judgment-based assumptions for projecting interest rates leads to frequent miscalculations, inflated debt servicing costs, and diminished market confidence.

Data from the Ministry of Finance shows that between FY2020–21 and FY2024–25, the government consistently underestimated its actual interest payments, with deviations ranging between 4% and 12% above budget estimates. The divergence was most pronounced in the foreign debt segment, where actual costs exceeded projections by as much as 44% in FY2023–24. These repeated gaps, the analysis notes, expose fiscal planning to unanticipated market shifts and erode the credibility of budgetary forecasts.

The report further points out that the absence of systematic forecasting also disrupts coordination between fiscal and monetary authorities, increasing the risk of pro-cyclical fiscal behaviour. Without reliable forward-looking models, the Ministry of Finance is unable to conduct meaningful sensitivity analyses or simulate different yield curve scenarios—tools that are vital for assessing refinancing and interest rate risks.

As a result, Pakistan’s debt issuance strategy has often been reactive rather than strategic. The government’s auction decisions for Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) remain largely influenced by short-term market conditions, leading to suboptimal maturity profiles and higher borrowing costs.

This analytical weakness, the report observes, also undermines the credibility of key fiscal documents such as the Medium-Term Debt Strategy (MTDS) and the Statement of Fiscal Risks, both of which rely on quantitative projections and scenario-based analyses.

A major structural shift in the composition of domestic debt occurred in September 2024, when a reduction in the policy rate—from 22% to 17.5%—prompted increased issuance of long-term instruments such as PIBs and Ijarah Sukuk. By May 2025, the policy rate had fallen further to 11%, lengthening the average maturity of public debt. However, the report cautions that this transition may have been premature, given ongoing uncertainty about future interest rate trends.

Despite robust investor appetite for short-term T-bills during this period, the government rejected excess bids and opted to prioritize long-term borrowing. Data from the State Bank of Pakistan (SBP) indicates that these choices reflected prevailing market expectations about future interest rate trends and the shape of the yield curve.

The episode, the report concludes, highlights an urgent need to develop a robust, data-driven forecasting framework for interest rates and yield curves. Establishing such a model, it stresses, would enable policymakers to make timely, evidence-based decisions in debt management—aligning fiscal operations with Pakistan’s broader macroeconomic stability and risk management objectives.

Credit: INP-WealthPk