Pakistan’s latest Medium-Term Debt Management Strategy (MTDS) for FY2026-28, published by the Finance Division’s Debt Management Office, outlines a new approach to tackle rising debt challenges. The government plans to lean on financial hedging tools to curb foreign exchange volatility while simultaneously broadening domestic debt markets with instruments like futures, swaps, and Sharia-compliant securities.
Tackling Exchange Rate Risk with Hedging
A key element of the plan is the use of hedging instruments to cushion the economy against currency swings. This is particularly important for a country like Pakistan, where external shocks and exchange rate instability often feed into debt repayment pressures. The government has also indicated openness to “innovative” approaches such as debt-for-nature swaps—arrangements where debt is reduced in exchange for environmental commitments.
Debt Landscape: More Domestic, But Costlier
Public debt is projected to hit Rs78.2 trillion (USD 275.9 billion) by June 2025, amounting to roughly 68% of GDP. The burden is increasingly domestic, with homegrown borrowing making up 68% of the total, up from 62% in 2023. While external loans carry cheaper rates (around 4.4% on average), domestic borrowing is significantly more expensive, with costs averaging 15.8%. This imbalance means interest payments alone are expected to eat up nearly 6% of GDP in FY2025—a heavy strain on fiscal space.
Refinancing Risks Improving, But Interest Rate Exposure Rising
On the positive side, Pakistan has extended the maturity profile of its debt, reducing rollover risk. The average time to maturity for domestic debt improved from 2.7 years in 2024 to 3.8 years in 2025, while external debt maintains a more comfortable average of over six years. However, nearly 80% of domestic debt will be exposed to interest rate changes by 2026 because of the reliance on floating-rate borrowing—a risk in a high-rate environment.
Strategy: Longer-Term, Fixed-Rate Debt in Focus
To counter these risks, the government plans to issue more long-term, fixed-rate debt. This includes greater reliance on Pakistan Investment Bonds (PIBs) and the introduction of zero-coupon bonds, aimed at attracting institutional investors. The strategy explicitly seeks to move away from short-term T-bills and floating-rate debt, which currently dominate the portfolio.
Push for Islamic Finance and Market Deepening
Another highlight of the strategy is the push to expand the role of Sharia-compliant instruments, with a target for them to exceed 20% of total domestic securities. This reflects both rising investor demand and the government’s intent to broaden participation in domestic capital markets.
Economic Assumptions Behind the Plan
The MTDS is built on the assumption that Pakistan’s nominal GDP will grow from Rs114.7 trillion in FY2025 to Rs162.5 trillion by FY2028, supported by agriculture and manufacturing. It also banks on achieving a primary surplus of around 1% of GDP, consistent with IMF program requirements. Whether these projections hold will ultimately determine the success of the debt strategy.
