Moaaz Manzoor

In a landmark fiscal move, Pakistan’s Rs1.5 trillion debt repayment is reshaping its global image, boosting investor confidence and signaling a move from reactive firefighting to proactive economic governance — making a case for accessing the global capital markets, say experts.

However, experts view that the underlying vulnerabilities, particularly low revenue generation and external shocks, demand urgent structural reforms to avert a reversal. Speaking to WealthPK, Uzma Aftab, a senior researcher at the Policy Research and Advisory Council (PRAC), noted that the early retirement of public debt and the SBP repayment constitute a “significant fiscal adjustment.”

“These measures, supported by the SBP’s profit transfer, have eased financial pressures and created a fiscal space for debt reduction,” she noted. This progress, she explained, has moved Pakistan closer to the Emerging Markets and Developing Economies (EMDEs) average debt-to-GDP threshold of 60–65%, which reduces macroeconomic vulnerability.

“Most importantly, this signals fiscal discipline — a move that could improve market confidence and potentially reduce future borrowing costs,” she emphasized. However, she warned that medium- to long-term debt sustainability remained precarious. “The debt-to-GDP ratio, though improved, still exceeds the legal limit of 67.5% under the Fiscal Responsibility and Debt Limitation Act (FRDLA),” she cautioned.

Uzma pointed out persistent structural flaws, including a low tax-to-GDP ratio of roughly 10%, which is well below the World Bank’s recommended minimum of 15%. This continues to undermine repayment capacity and encourage further borrowing. She also flagged currency depreciation and low GDP growth (2–3%) as major threats that could trigger the recurrence of debt distress by FY26–27 if the reforms stall. To sustain the momentum, she stressed the need for structural reforms.

“Pakistan must refinance short-term external debt into longer maturities, aggressively introduce tax reforms, and build reserves to cushion against global volatility,” she further emphasized. Meanwhile, Ali Najib, Deputy Head of Trading at Arif Habib Ltd, noted that as of June 2025, the banking sector remained stable, driven by the rising deposits (PKR35.5tn, up 14.1% YoY) and investments (PKR36.6tn, up 21.2% YoY), largely in government securities.

He highlighted that the banks were tilting towards risk-free government papers due to uncertainty, evident in the Investment-to-Deposit Ratio (IDR) hitting 103%. However, he cautioned that muted credit growth could constrain private sector development unless macroeconomic stability improves. Despite improved reserves, the State Bank’s holdings are now at a 39-month high of $14.5 billion. Structural reforms remain essential to transition from short-term fixes to long-term sustainability.

Credit: INP-WealthPk