Pakistan’s public debt does not automatically cause inflation, raise the State Bank of Pakistan’s policy rate, or weaken the rupee. It can influence all three through fiscal demand, borrowing costs, and foreign-currency exposure—but the effects depend on how much the government must borrow, the debt’s currency and interest-rate terms, access to financing, reserves, and confidence in economic policy.
First, separate the debt stock, interest expense, and policy rate
These three figures describe different things. Confusing them makes the relationship between debt, prices, borrowing costs, and the rupee seem more mechanical than it is.
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- Public-debt stock: the accumulated amount the government owes at a point in time. It includes principal owed to domestic and external creditors.
- Markup or interest expense: the cost of servicing debt over a period. It depends not only on the stock, but also on rates, maturities, and which loans or securities are due to be repriced or refinanced.
- SBP policy rate: the central bank’s monetary-policy instrument for influencing inflation and economic conditions. It is not a rate automatically determined by the public-debt total.
A large debt stock can create fiscal pressure if servicing it absorbs a substantial share of government resources. But that pressure does not, by itself, establish what inflation or the policy rate will be: fiscal choices, market conditions, and the credibility of monetary policy also matter.
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How can public debt affect inflation in Pakistan?
The connection runs through the budget and the economy, not a one-for-one formula. Borrowing can support public spending and aggregate demand. If deficits and financing keep demand above what the economy can sustainably produce, or if markets doubt that monetary policy can resist fiscal pressure, inflation risks can rise.
In its October 2024 Article IV consultation, the IMF said earlier fiscal and monetary stimulus intended to support activity did not produce durable growth. It assessed that domestic demand had exceeded sustainable capacity, contributing to inflation and reserve depletion, and argued that reducing fiscal dominance could strengthen monetary-policy transmission. Read the IMF’s 2024 Article IV report.
This does not mean every increase in debt produces inflation. The effect depends on what the borrowing finances, whether the economy has spare capacity, how the deficit is funded, and whether monetary policy can respond credibly. Debt can also rise for reasons that do not immediately increase demand, while inflation can have other drivers.
Inflation can lower the debt ratio on paper
When prices and nominal GDP rise faster than the nominal debt stock, the debt-to-GDP ratio can fall, particularly for nominal debt denominated in domestic currency. The SBP estimated that inflation reduced Pakistan’s public-debt-to-GDP ratio by 2.5 percentage points in FY2025; its estimated contribution was 13.6 percentage points in FY2024. These are accounting contributions to the ratio, not measures of a wider economic benefit. See the SBP’s Annual Report 2024–25, Chapter 4.
Inflation still reduces purchasing power. It can also put pressure on yields, the exchange rate, and future borrowing costs. A lower debt ratio caused by a larger nominal GDP denominator therefore does not mean the underlying fiscal burden has disappeared.
How does government borrowing affect interest rates?
Government borrowing can affect market yields and the cost of financing, but that is different from saying public debt alone sets the SBP policy rate. When the government needs substantial domestic financing, it competes with other borrowers for funds; the cost of new borrowing can respond to market yields and investor demand. If borrowing needs are difficult to manage, they can also complicate the central bank’s effort to keep monetary policy focused on inflation.
The timing of the budget impact depends on the terms of the debt. Pakistan’s Ministry of Finance lists short-term Treasury bills, longer-term Pakistan Investment Bonds (PIBs), including fixed- and floating-rate forms, and Government Ijara Sukuk. Floating-rate PIB profit rates are linked to reference yields such as three- or six-month Treasury bills. A change in market yields can therefore feed into government financing costs as debt is issued, refinanced, or repriced, rather than changing every existing payment at once. See the Ministry of Finance’s Pakistan Economic Survey 2024–25, Chapter 9.
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The SBP’s policy rate is set in response to monetary-policy considerations, including inflation and economic conditions. Large fiscal financing requirements may constrain the policy environment, but the rate is not mechanically determined by the debt stock. In its May 2026 review, the IMF called for appropriately tight monetary policy to anchor inflation expectations; that is policy guidance, not a published policy-rate reading. Read the IMF’s May 8, 2026 review announcement.
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Why can rupee depreciation make debt more expensive?
When the rupee depreciates, a foreign-currency obligation costs more in rupees to repay or service, all else equal. That can increase the government’s rupee financing needs and the domestic-currency value of external debt. Depreciation can also raise the rupee cost of imports, which may add to inflation pressure.
The relationship also runs the other way: fiscal slippage, reduced access to external financing, or reserve stress can put pressure on the exchange rate. The IMF has described exchange-rate flexibility as a shock absorber and a way to support reserve rebuilding. See the IMF’s September 27, 2024 announcement.
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Public debt is only one influence on the rupee. Trade balances, remittances, capital flows, reserve intervention, global dollar conditions, energy prices, and market expectations also matter. Debt composition indicates exposure; it does not explain every exchange-rate movement.
What Pakistan’s published debt figures show
The official figures below cover different reporting periods and, in some cases, different debt definitions. A nominal stock, a debt-to-GDP ratio, and a budget estimate should not be treated as readings from the same date or as interchangeable measures.
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|---|---|---|
| Public-debt stock and composition | At end-March 2025, Rs 76,007 billion in total: Rs 51,518 billion domestic and Rs 24,489 billion external. | A point-in-time nominal stock. The amounts are from the Ministry of Finance’s Pakistan Economic Survey 2024–25, Chapter 9; they are not the end-June 2025 debt ratio below. Source. |
| Public debt as a share of GDP | 70.8 percent at end-June 2025, compared with 67.7 percent at end-June 2024. | A ratio reported by the SBP for those fiscal-year-end dates. It is not directly comparable to the end-March nominal stock without accounting for the different date and denominator. Source. |
| Markup expenditure | Rs 6,439 billion in July–March FY2025, equal to 66 percent of the full-year FY2025 budget estimate of Rs 9,775 billion. Domestic interest accounted for Rs 5,783 billion of the nine-month amount. | An expenditure recorded for nine months compared with a budget estimate for the full fiscal year—not a full-year outturn. Source. |
| External share of public debt | 32.2 percent in March 2025, down from 36.7 percent in December 2023. | A smaller foreign-currency share reduces the debt stock’s direct exchange-rate exposure, but does not remove it. Source. |
| Average time to maturity and fixed-rate securities | As of March 2025, domestic debt’s average time to maturity was 3.5 years and external debt’s was 6.2 years; fixed-rate debt was 19.0 percent of government securities. | Maturity affects refinancing timing; fixed- and floating-rate terms affect how costs respond to yields. The fixed-rate share refers to government securities, not the entire public-debt stock. Source. |
| FY2026 inflation and debt outlook | The IMF’s May 8, 2026 review projected average inflation of 7.2 percent, end-period inflation of 11.5 percent, and general-government debt excluding IMF obligations of 67.5 percent of GDP. | These are IMF projections, not completed FY2026 observations. The general-government debt measure has a different scope from the Ministry of Finance public-debt stock above. Source. |
Which debt features matter most for the risks?
The headline total is only part of the picture. Two debts of the same size can create different pressures depending on currency, interest-rate terms, maturity, and the government’s capacity to meet payments from revenue and financing.
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- Domestic versus external: Domestic borrowing is generally less directly exposed to exchange-rate revaluation than foreign-currency obligations. External debt still creates rupee-cost and external-payment exposure if the currency weakens.
- Fixed versus floating rates: Fixed-rate payments are more predictable over their stated term; floating-rate debt can reprice as reference yields change.
- Short versus longer maturity: Shorter maturities mean financing needs return sooner. Longer maturities can spread refinancing over time, though they do not remove the cost of servicing the debt.
- Stock versus service burden: The principal owed shows the scale of liabilities; interest expense shows a recurring budget claim. Their fiscal significance also depends on revenues and access to financing.
For that reason, a falling external share or a lower debt-to-GDP ratio should not be read alone as proof that debt risks have vanished. Nor does a high debt stock establish that inflation, market yields, or the rupee must move in a particular direction.
What the figures do not establish
The cited releases do not provide a verified SBP policy-rate reading, rupee spot quote, or completed FY2026 public-debt stock for October 4, 2026. The IMF’s May 2026 projections should not be presented as current outcomes. Debt statistics also depend on scope: the IMF general-government measure excluding IMF obligations is not the same definition as the Ministry of Finance’s public-debt total.
In practical terms, assess debt through the combination of its stock, annual servicing cost, currency and repricing exposure, fiscal position, financing access, reserves, and policy credibility. That is what determines whether debt pressure is likely to spill over into inflation, borrowing costs, or the rupee.
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