Pakistan’s growing reliance on domestic borrowing has once again come into focus as the federal government plans to raise Rs6.525 trillion through the sale of security bonds over the next three months, from March to May. The development emerged following a high-level review meeting held at the State Bank of Pakistan (SBP), where policymakers also discussed measures aimed at promoting a more cashless economy. The scale and timing of the planned borrowing have triggered debate among economists and financial analysts who warn that such borrowing could reflect deeper fiscal challenges, including widening gaps between government revenues and expenditures. The planned bond sales, taking place just months before the announcement of the next federal budget, suggest that the government may be seeking additional financing to meet its fiscal obligations during the final quarter of the current fiscal year.

Timing of Bond Sales Signals Fiscal Pressure

The timing of the government’s plan to raise more than Rs6 trillion through domestic borrowing has raised concerns among financial experts. In Pakistan, the federal budget is typically presented in June, which marks the final month of the fiscal year. Borrowing such a large amount during the final quarter suggests that the government may be facing a significant shortfall between its projected revenues and expenditures. Analysts point out that the country’s budget structure leaves limited space for fiscal flexibility because a large portion of government spending is allocated to recurring expenses. Approximately 93 percent of the current fiscal year’s budget has been earmarked for current expenditures such as salaries, subsidies, pensions and debt servicing. With development spending often reduced during the year to manage fiscal pressures, economists warn that the newly planned borrowing may largely finance consumption rather than investments that improve economic productivity.

Inflationary Risks Linked to Borrowing Strategy

Economists also caution that borrowing to finance expenditures not tied to productive economic activity can have inflationary consequences. When governments rely heavily on domestic borrowing without corresponding increases in economic output, the resulting liquidity can fuel inflationary pressures across the economy. In Pakistan’s case, such concerns are particularly relevant because inflation has remained a key economic challenge in recent years. If borrowed funds are primarily used to cover operational spending rather than development projects that generate economic growth, the policy may increase demand in the economy without improving supply conditions. This imbalance can contribute to rising prices, placing additional pressure on households and businesses already coping with high living costs.

IMF Pressure and Interest Rate Challenges

Another issue highlighted by economists relates to the potential response from international financial institutions, particularly the International Monetary Fund (IMF). Under previous and ongoing IMF programmes, the Fund has often recommended tighter monetary policy when inflation risks increase. With Pakistan’s current policy rate already standing at 10.5 percent, further pressure to raise interest rates could have significant consequences for economic growth. Pakistan’s manufacturing sector, particularly large-scale industries, has repeatedly expressed concerns that high borrowing costs limit their ability to compete with regional economies where interest rates are significantly lower. If monetary policy tightens further in response to inflation or fiscal pressures, businesses may face higher financing costs that could reduce investment and industrial production.

Impact on Economic Growth Prospects

Higher interest rates and rising borrowing costs can also affect broader economic growth prospects. The large-scale manufacturing sector plays a crucial role in Pakistan’s industrial base and employment generation. However, industry representatives argue that elevated borrowing costs discourage expansion and investment in new production capacity. At the same time, global geopolitical tensions, particularly the ongoing conflict in the Middle East, have added another layer of uncertainty to Pakistan’s economic outlook. Rising energy prices and disruptions in global trade could slow economic growth and increase pressure on the country’s balance of payments. These external risks make the government’s borrowing strategy even more significant, as fiscal and monetary policies must be carefully coordinated to maintain economic stability.

Rapid Increase in Domestic Debt Levels

Pakistan’s domestic debt levels have been steadily rising over recent years, reflecting the government’s continued reliance on borrowing to finance fiscal deficits. Official data shows that domestic debt increased from Rs54.472 trillion at the end of June 2025 to Rs55.363 trillion by the end of December 2025. This represents an increase of approximately Rs891 billion during the first half of the fiscal year. Given that the budget initially projected domestic borrowing of Rs3.436 trillion for the entire fiscal year, the new plan to raise Rs6.525 trillion within just three months has raised serious concerns among financial analysts. The proposed borrowing would represent a nearly 90 percent increase compared with the amount initially budgeted for the year, raising questions about fiscal sustainability and the government’s long-term debt management strategy.

Rising Cost of Debt Servicing

Another major concern associated with rising domestic borrowing is the increasing cost of debt servicing. Interest payments on government debt already account for a large portion of Pakistan’s annual budget expenditures. Although the current fiscal year projected a slight reduction in debt servicing costs compared with revised estimates from the previous year, this assumption was partly based on expectations that interest rates would decline significantly by the end of 2025. However, the central bank’s reduction in the policy rate last year amounted to only a modest 50 basis points, which may not be sufficient to produce the anticipated decline in overall interest costs. Furthermore, recent increases in cut-off yields on short-term government securities indicate that borrowing costs may actually rise rather than fall.

Outlook for Fiscal Discipline and Economic Reform

Pakistan’s long-term economic stability will depend heavily on improving fiscal discipline and reducing reliance on debt-financed spending. While policymakers have frequently emphasized the need to reduce current expenditures and improve fiscal management, economists argue that concrete reforms are needed to achieve these goals. Strengthening revenue collection, improving efficiency in government spending and prioritizing productive investments could help reduce the country’s dependence on borrowing. Without such reforms, rising debt levels may continue to place pressure on both fiscal policy and monetary policy in the years ahead.