KARACHI: While the foreign debt servicing remained almost the same in the budget for fiscal year 2025-26, the domestic debt target for the same year has been slashed by over Rs1.5 trillion compared to the last year.

The burden of domestic debt has significantly been reduced due to a sharp decline in the interest rate, which fell from 22 per cent in June 2024 to the currently prevailing 11pc.

Interestingly, Finance Minister Muhammad Aurangzeb said the government saved Rs850 billion through refinancing while the central government’s debt increased by Rs5.36tr to Rs52.52tr in April 2025. For contrast, the central government’s debt had reached Rs47.16tr in June 2024.

According to the budget document, foreign debt servicing was projected as Rs1.04tr for FY25 which was revised downward to Rs1.01tr. However, the government projected an even lower amount of Rs1.01tr for FY26.

Domestic debt servicing slashed by Rs1.5tr to Rs7.19tr for FY26

As for domestic debt servicing, the government projects Rs7.19tr for the FY26 budget. The amount has been slashed by Rs1.54tr compared to the allocation of Rs8.74tr in the budget of FY25. This was possible due to the 50pc decline in the interest rate, which created space for the government to borrow at a cheaper rate and reduce its debt servicing.

At the same time, the government has increased the maturity period as it seemingly prefers to borrow for longer durations. The finance minister said the average time to maturity has been increased to 66pc which reduced refinancing risk and brought about stability.

The government has been borrowing through long-term Pakistan Investment Bonds, which reached $34tr in April 2025 from Rs28tr in June 2024. At the same time, the borrowing through the short term has been dropped to Rs8.2tr in April FY25 from Rs10.2tr in June; this clarifies the government’s approach toward the borrowing mechanism.

Finance Minister Aurangzeb further stated that the debt-to-GDP ratio has come down to under 70pc from 74pc two years before. The ratio is still high; however, the lower interest rates and lesser borrowings with a higher tax revenue could further improve this ratio. The lower ratio is considered a sign of stability. He also mentioned that the investors’ base has been increased to diversify debt products. For this purpose the government has already launched Sukuk Bonds.

In Dec 2024, the government raised approximately Rs2tr through the Sukuk (Islamic bonds), offering an innovative Islamic avenue for financing.

The government is also trying to make it easy for an individual to buy treasury bills, which will further diversify the investors’ base. For the past two years, the government has been trying to launch Panda Bonds and explore a new market for financing. So far, it has remained a dream; however, the financer, in its budget speech, announced that the government is now ready to launch said bonds. Though he did not mention time, he explained that the purpose of launching the bond is to enter the large and lucrative Chinese capital market.

The finance minister also announced that the State Bank’s foreign exchange reserves will reach $14bn by the end of this fiscal year on June 30, 2025. The reserves of the State Bank on May 30, 2025, were $11.5bn; short of $2.5bn to catch the prescribed figure.

Published in Dawn, June 11th, 2025