By Azam Tariq

Pakistan improved the structure of its domestic debt during the first half of FY26 by increasing reliance on long-term fixed-rate instruments and reducing short-term borrowing, according to the State Bank of Pakistan’s Half Year Report 2025-26. The report said domestic debt increased by Rs891.6 billion in H1-FY26, sharply lower than the Rs2.723 trillion expansion recorded in the same period last year. The slowdown reflected a fiscal surplus, healthy SBP profit and a notable reduction in interest payments.

The government also retired Rs1.6 trillion in SBP loans during the review period, further contributing to the slower pace of domestic debt accumulation. The SBP said the government deliberately shifted its borrowing strategy to reduce rollover and interest-rate risks. Authorities continued borrowing through long-term fixed-rate securities while curtailing mobilisation through Treasury bills. As a result, the share of fixed-rate instruments in domestic debt increased to 33.5 percent at the end of H1-FY26 from 27.0 percent at the end of FY25.

The share of long-term securities, mainly Sukuk, also increased to 77.7 percent at the end of H1-FY26 from 75.9 percent in the corresponding period last year. This change in debt composition matters because Pakistan has long faced heavy refinancing risks due to its reliance on short-term domestic borrowing. A larger share of fixed-rate and longer-maturity instruments can improve predictability in future debt-servicing costs and reduce exposure to sudden interest-rate movements.

The SBP said the overall public debt profile improved in terms of average time to maturity, rollover risk, interest cost and currency risk during the period. Exchange-rate stability also helped reduce currency risk. The improvement came alongside a steep decline in interest payments, higher revenue collection, stronger remittances and continued buildup in foreign exchange reserves. These developments improved Pakistan’s debt repayment capacity and solvency indicators.

Foreign exchange reserves rose to $16.1 billion by December 2025 from $14.5 billion at the end of FY25, while remittances increased to $19.7 billion during H1-FY26 from $17.8 billion a year earlier. However, the SBP noted that liquidity indicators presented a mixed picture because short-term external debt increased during H1-FY26. The broader debt outlook remains linked to Pakistan’s fiscal discipline and external stability.

Lower interest rates have provided immediate relief, but renewed inflationary pressures from higher oil prices could complicate debt management in coming quarters. The Middle East conflict has increased the risk of higher import costs, greater energy subsidies and pressure on fiscal balances. Any reversal in inflation could also slow the pace of monetary easing and raise future borrowing costs.

The report’s debt analysis suggests that Pakistan has made measurable progress in improving its debt profile, but the gains remain dependent on continued fiscal consolidation, exchange-rate stability and stronger revenue mobilisation. For long-term sustainability, the SBP’s message is clear: Pakistan needs a broader tax base, stronger exports and higher productive investment to reduce dependence on debt-financed growth.

Credit: INP-WealthPk