The fiscal deficit and the rising burden of public debt have become serious concerns for economists, policymakers, businesses and ordinary citizens. These issues are no longer just technical matters found in financial documents; they directly affect inflation, growth, employment, the quality of public services and the everyday life of people. Although the situation is concerning, Pakistan is not without hope. Recent figures show both areas of improvement and areas that require immediate attention, and with the right choices, the country can still move towards stability.
For the fiscal year 2024–25, Pakistan recorded a fiscal deficit of around Rs7.1 trillion, which is lower than the previous year’s figure of around Rs7.7 trillion. As a share of GDP, the deficit declined to around 6.2 per cent, while the combined federal and provincial deficit stood near 5.4 per cent of GDP. One encouraging development was the presence of a primary surplus of approximately 2.4 per cent of GDP, amounting to around Rs2.7 trillion. A primary surplus means the government’s revenues exceeded its non-interest spending, a sign of better fiscal management.
Despite these improvements, the overall debt picture remains challenging. By late 2025, Pakistan’s total public debt had risen to around Rs80.6 trillion, or $286.8 billion, marking a 13 per cent increase compared with the previous year. The debt-to-GDP ratio also climbed to around 70 per cent from 68 per cent, indicating that debt is still growing faster than the economy. Domestic debt made up around Rs54.5 trillion of the total, while external debt stood at around Rs26 trillion. Although the government managed to extend the maturity of domestic debt to an average of 3.8 years, up from around 2.8 years earlier, the overall volume of debt continues to create pressure on public finances. The average maturity of total public debt has also improved to around 4.5 years, which offers a little more breathing room. Prudent management and lower interest rates helped save more than Rs850 billion in interest costs compared with the initial estimates, but these savings cannot offset the reality that the total debt stock continues to pile up.
Pakistan’s wider economic indicators show some stability. The economy grew around 2.7 per cent in FY2025, while inflation dropped to around 4.6 per cent. Although this combination is far better than the previous year, the pace of growth is still too slow to reduce poverty meaningfully, create enough jobs or support stronger revenue generation. One reason the debt-to-GDP ratio increased was that nominal GDP did not grow as quickly as expected. Lower inflation, while good for households, slows the growth of nominal output and makes debt appear larger in comparison.
The fiscal situation also remains threatened by the ongoing problems in the energy sector. By December 2024, the combined circular debt of the power and gas sectors reached around Rs4.7 trillion. This enormous liability continues to grow due to widespread inefficiencies, theft, technical losses, delayed payments and slow tariff adjustments. Estimates suggest that servicing this circular debt alone may cost the government around Rs937 billion annually between FY2026 and FY2028. Without real reforms in the energy supply chain, the circular debt will continue to consume valuable fiscal space and worsen the debt problem.
When a government spends so much of its income on debt servicing, it is forced either to cut essential services or borrow more to fund them. This creates a cycle that becomes harder to break with each passing year
Although the primary surplus and the narrowing deficit show signs of improvement, the rapid rise in the total public debt remains a serious challenge. Interest payments still take up a huge portion of the federal budget, leaving very little for development, education, healthcare, infrastructure, social protection and security. When a government spends so much of its income on debt servicing, it is forced either to cut essential services or borrow more to fund them. This creates a cycle that becomes harder to break with each passing year.
High public debt also weakens Pakistan’s position in the face of external shocks. Sudden increases in global oil prices, natural disasters or disruptions in the international financial markets can quickly worsen the country’s fragile fiscal position. When international lenders see that a country has large debts and slow economic growth, they become more cautious. Borrowing becomes costlier, refinancing becomes more difficult and investor confidence declines. If this cycle continues without reform, the risk of severe economic stress, or even a default, becomes greater.
Pakistan does, however, have several realistic options to improve its situation. The first step is to maintain fiscal discipline by cutting unnecessary spending, improving the efficiency of government departments and reforming loss-making state-owned enterprises, especially those in the energy sector. Good governance, reduced political interference and professional management can significantly reduce financial losses. Strengthening the tax system is equally important. Pakistan has one of the lowest tax-to-GDP ratios in the region, with a large informal economy and widespread tax evasion. Broadening the tax base, simplifying the tax rules, reducing exemptions and improving enforcement can raise revenue fairly. Encouraging digital payments and reducing dependence on cash can also help document economic activity and improve tax collection.
Economic growth must be placed at the centre of the recovery strategy. Higher growth naturally increases employment, incomes and government revenues. To achieve this, Pakistan needs targeted investment in agriculture, industry, technology and renewable energy. Small and medium-sized businesses should be supported through easier financing and less complicated regulations. Improving the business environment, reducing red tape and ensuring policy continuity can attract investment. Promoting exports, especially value-added products, can reduce the current account deficit and support long-term stability.
Better management of external borrowing is important. Pakistan must extend debt maturities where possible, rely less on short-term borrowing and negotiate favourable terms with international lenders. Diversifying financing sources, such as through green bonds or sukuk, can reduce dependence on costly commercial loans. Building foreign exchange reserves is essential to protect against external shocks.
Strong and transparent institutions remain at the heart of any long-term solution. Modernising public financial management, digitalising procurement, improving audit systems and reducing corruption will all contribute to greater efficiency and accountability. Social protection should not be overlooked, as fiscal discipline must not come at the expense of the poorest. Well-designed welfare programmes, skills training, and better access to healthcare and education can help vulnerable groups cope with economic pressures while contributing to the country’s future productivity.
Pakistan needs long-term planning that stays in place regardless of changes in government. Consistent economic policies and medium-term fiscal frameworks create predictability and trust. Policymakers must regularly assess fiscal risks, including those from the energy sector, state-owned enterprises and climate-related threats. Clear communication with the public is also necessary. Economic reform is rarely popular; tax increases, subsidy cuts and restructuring often face resistance. But when people understand why such reforms are necessary and believe that the burden is being shared fairly, they are more likely to support difficult decisions.
While the challenges are serious, they are not impossible to overcome. With determination, fiscal discipline, fair taxation, economic diversification, stronger institutions, social protection and a stable long-term strategy, Pakistan can gradually restore economic stability. The road ahead will require patience and strong political commitment, but with consistent effort, the country can break the cycle of deficits and debt and move towards a more prosperous and secure future.