By Hasan Salahuddin

Pakistan’s public debt accumulation slowed significantly during the first half of FY26 as declining interest payments, fiscal consolidation and exchange-rate stability improved the country’s debt dynamics, according to the State Bank of Pakistan’s Half Year Report 2025-26.

The report said sustained fiscal consolidation and a sharp decline in mark-up payments substantially reduced the pace of public debt accumulation during H1-FY26.

According to the SBP, easing inflation and lower policy rates helped reduce the government’s debt-servicing burden after years of exceptionally high financing costs.

The report noted that a key factor behind Pakistan’s fiscal surplus in the first half of FY26—the first such outcome since FY02—was the sharp decline in interest payments.

The central bank said exchange-rate stability also supported overall debt sustainability.

The appreciation of the Pakistani rupee against the US dollar during H1-FY26 reduced the local-currency valuation impact on external debt stocks. The rupee appreciated 1.3 percent during the review period.

Lower accumulation of government deposits further helped slow debt growth.

According to the report, the government also adjusted its domestic borrowing strategy to take advantage of falling interest rates.

The SBP said authorities increasingly shifted toward fixed-rate long-term borrowing instruments while retiring short-term debt, thereby lengthening the maturity profile of domestic liabilities.

This strategy reduced refinancing risks and improved predictability in future debt-servicing costs.

The report said improving macroeconomic indicators also strengthened Pakistan’s debt repayment capacity.

Higher revenue collection, stronger remittance inflows and continued buildup in foreign exchange reserves supported both fiscal and external sustainability during the review period.

Pakistan’s liquid foreign exchange reserves increased from $14.5 billion at the end of FY25 to $16.1 billion by December 2025. Workers’ remittances also rose to $19.7 billion during H1-FY26 from $17.8 billion in the same period last year.

The report said these developments improved the country’s liquidity and solvency indicators.

Meanwhile, the government’s domestic borrowing requirements remained elevated during the second quarter of FY26.

The report noted that higher budgetary borrowing from scheduled banks boosted the banking system’s net domestic assets during the review period.

At the same time, growth in private-sector credit and higher currency circulation also affected liquidity conditions in financial markets.

The SBP actively managed liquidity through open market operations to maintain stability in short-term money markets and strengthen monetary-policy transmission.

Despite the improvement in debt dynamics, the central bank warned that Pakistan remains vulnerable to external shocks and rising global energy prices.

The war in the Middle East has increased uncertainty regarding oil prices, external financing conditions and supply chains, potentially affecting fiscal balances and debt sustainability.

Higher oil prices could increase subsidy requirements, widen fiscal deficits and raise external borrowing needs in coming months.

The report projected the fiscal deficit within the range of 3.5 percent to 4.5 percent of GDP for FY26.

Similarly, lower inflation, fiscal consolidation and exchange-rate stability have started easing pressures on public finances after a prolonged period of severe economic stress.

However, analysts cautioned that long-term debt sustainability would require deeper structural reforms aimed at increasing exports, broadening the tax base and improving economic productivity.

The SBP stressed that maintaining fiscal discipline and strengthening macroeconomic fundamentals remain essential for preserving investor confidence and reducing future debt vulnerabilities.

Credit: INP-WealthPk