Pakistan's interest repayments on account of both domestic and external debt are projected to remain elevated over the medium term and will continue to eat away a major chunk of resources. The interest repayments have outpaced defence and development expenditure simultaneously.

One of the reasons for rising interest payments is the increase in the absolute figure of debt burden. "Interest payments are projected in the range of Rs8.054 trillion for the current fiscal year, which might further go up slightly in the aftermath of a 50 basis points hike in the policy rate announced by the Monetary Policy Committee of the State Bank of Pakistan (SBP), raising the policy rate from 11.5 percent to 12 percent," top official sources confirmed.

Securing of debt, especially from foreign lenders, is now considered a big success of the government, but ballooning debt servicing is posing serious risks for the fiscal framework. The government argues that the debt-to-GDP ratio is falling in the country.

The debt servicing on domestic and external borrowing has eaten away a major chunk of resources generated by the country in the shape of tax and non-tax revenues on an annual basis. After providing a share to the provinces under the National Finance Commission (NFC) Award, the Centre was left with meagre resources only sufficient to meet the obligation for repayment of interest on domestic and foreign loans.

In the recent past, the Centre used to turn into deficit after paying interest payments. But from the last fiscal year, the Centre was left with net revenue receipts of only Rs3 trillion after making interest repayments.

So the perpetual federal fiscal deficit hovered around Rs7 trillion, and the consolidated deficit could be reduced in the range of over Rs5 trillion, possible only with the contribution of provinces by generating revenue surplus to the tune of Rs1.5 to Rs2 trillion on an annual basis.

This ad hoc arrangement will serve no purpose as the federal government had borrowed over Rs1.035 trillion by invoking Article 164 of the 1973 Constitution. The interest payments, according to the working of the Ministry of Finance, are projected at Rs8.68 trillion by FY2029.

On the other hand, the International Monetary Fund (IMF) has projected that the interest repayment of Pakistan might hover around at Rs7.284 trillion in FY2026-27, Rs8.273 trillion in FY28, Rs8.681 trillion in FY29, Rs9.365 trillion in FY30 and Rs10.322 trillion in FY31.

"The debt servicing pressure will remain elevated over the medium term," said the official sources, adding that the federal fiscal deficit will be standing at Rs7 trillion or 4.9 percent of Gross Domestic Product (GDP), Rs7.1 trillion or 4.5 percent of GDP in 2027-28 and Rs7.5 trillion or 4.2 percent of GDP in FY 2028-29.

The economic outlook suggests that without structural reforms and a significant increase in revenue generation, the fiscal space for public welfare and development will continue to shrink, leaving the government with limited options to manage the mounting debt obligations.