KARACHI: "Pakistan is drowning in debt" is a sentence everyone has heard and few can unpack. How much debt? Owed to whom? In rupees or dollars? Due next month or in thirty years? At what interest rate? Each of those questions has a different answer, and the answers — not the single headline total — determine whether debt is a manageable burden or a crisis in waiting. Government debt also sits at the centre of the investor's world: it sets the risk-free interest rate against which all PSX shares are valued, it fills the balance sheets of the banks investors own, and its interest bill is the largest single claimant on the federal budget. This guide maps the debt stock piece by piece and explains the pricing mechanism for each part. It states no current total or rate as fact, because both change constantly; the State Bank of Pakistan (SBP) publishes the official debt statistics, and the Ministry of Finance publishes the government's own debt reports — check those for current numbers.
First, the vocabulary: deficit, debt, domestic, external
Debt is a stock; the budget deficit is a flow that adds to it. Every year the government spends more than it collects, it borrows the difference, and the accumulated total of all past borrowing, minus repayments, is the debt — the story of any single year is told in Pakistan's federal budget explained. Interest on the stock then becomes next year's spending, which is why a country can run relatively modest new deficits and still watch its interest bill grow if rates rise or the currency falls.
The most important split is domestic versus external. Domestic debt is owed within Pakistan, overwhelmingly in rupees: to commercial banks, to the public through National Savings, to pension and provident funds, insurance companies and other local institutions. External debt is owed abroad, overwhelmingly in foreign currency: to multilateral lenders such as the IMF, World Bank and Asian Development Bank, to friendly governments and their central banks, to foreign commercial lenders, and to international bondholders. The two kinds carry different risks. Rupee debt can always, in the last resort, be repaid with rupees the state can create — at the cost of inflation. Dollar debt cannot: it must be repaid with dollars the country must earn or borrow, which is why external debt, though often the smaller share, drives crises, as the story of the current account shows.
Analysts scale debt against the economy, usually as a percentage of gross domestic product (GDP), and against government revenue, because a debt that is large relative to GDP but serviced from a strong tax base is different from the same debt resting on a narrow one. Pakistan's fiscal responsibility law sets a broad ceiling for public debt relative to GDP and requires reporting when it is breached — check the Ministry of Finance debt policy statements for the current target and position. The ratio moves for three reasons: new borrowing adds to it, economic growth dilutes it, and inflation plus currency depreciation can push it either way — inflation erodes the real value of rupee debt but swells the rupee value of dollar debt when the currency falls.
Domestic debt: the banks, the bonds and the small saver
The workhorse instruments of domestic borrowing are auctioned by the SBP on the government's behalf. Treasury bills (T-bills) are short-term — issued for a few months up to a year — and sold at a discount, so the investor's return is the gap between purchase price and face value repaid at maturity. Pakistan Investment Bonds (PIBs) are the long-term counterpart, running for years, paying periodic profit or coupon payments, in both fixed-rate and floating-rate forms. Ijara sukuk are the Shariah-compliant equivalents, structured against underlying assets so that returns are rent-like rather than interest-based, and they have become a growing share of issuance as Islamic banking expands. Auction calendars, results and cutoff yields are published by the SBP; those yields are the closest thing Pakistan has to a market-set government interest rate at each maturity, and they move with the SBP policy rate, inflation expectations and the government's borrowing appetite.
Who buys? Commercial banks are the dominant holders, because government paper is liquid, carries no credit risk in rupee terms under local regulation, and at high policy rates pays handsomely. This creates the famous crowding-out dynamic: a bank choosing between a PIB yielding roughly the policy rate with zero paperwork risk and a loan to a mid-sized factory with credit risk and documentation headaches will rationally load up on government paper. The result is an economy where the state is the banking system's best customer — comfortable for banks' profits in the short run, and a structural reason private credit stays shallow. It also welds bank and sovereign together: stress on government finances transmits directly into bank balance sheets and vice versa.
The other domestic channel is National Savings, the government schemes sold over post office and National Savings centre counters to small savers, pensioners and widows — instruments such as savings certificates and accounts whose return rates are set administratively, linked broadly to PIB yields, and announced by the government. For millions of households these schemes are the formal savings system, and their rates are a political as well as financial decision. Alongside them sit provident funds, pension funds and insurers, steady institutional buyers of long-term paper. Ordinary investors can access this market indirectly through mutual funds, and increasingly government securities have been made tradable through the PSX for retail participants — see our guide to sukuk and government securities on the PSX for the mechanics.
A worked example clarifies pricing — invented round numbers, not current rates. Suppose the government auctions a one-year T-bill and investors, expecting inflation to stay high and the policy rate firm, bid so that Rs 100 of face value sells for Rs 85. The Rs 15 gap is roughly a year's return of about 17–18 percent on the price paid. If, mid-year, the SBP cuts rates sharply, newly auctioned bills sell for more — say Rs 90 — and anyone holding the older, cheaper paper can sell it at a capital gain. This is the entire bond market in miniature: prices and yields move in opposite directions, and the government's borrowing cost is set auction by auction, not by decree.
External debt: multilateral patience, bilateral friendship, market moods
External lenders fall into three families with very different temperaments. Multilateral lenders — the IMF, World Bank, Asian Development Bank and others such as the Islamic Development Bank and Asian Infrastructure Investment Bank — lend at relatively low cost and long maturities, but with policy conditions and project requirements attached. IMF lending is special: it is short-to-medium term, comes with the monitoring described in IMF programmes and Pakistan explained, and must be repaid on schedule regardless of circumstances, because the Fund sits at the top of the creditor hierarchy everywhere in the world. Bilateral lenders are foreign governments and their institutions: historic Paris Club creditors, and more recently large deposits and loans from friendly Gulf states and China-linked financing for energy and infrastructure projects, including under the China–Pakistan Economic Corridor. These loans are often rolled over rather than repaid, which makes them feel permanent until the moment a rollover is in doubt.
The third family is commercial and market borrowing: loans from international banks and, most visibly, Eurobonds and international sukuk — dollar bonds sold to global investors with a fixed coupon and a single bullet repayment at maturity. Market borrowing is the most expensive and the most honest: its price, the yield investors demand, moves daily with Pakistan's perceived risk, which is exactly what sovereign credit ratings summarise. When market access closes — as it does in stressed periods — maturing bonds must be repaid from reserves or replaced with other borrowing, and the refinancing calendar becomes front-page news. The rollover routine across all these creditors is dissected in external financing explained.
External debt also includes the liabilities of state-owned enterprises guaranteed by the government and borrowing by public sector entities, which is why statisticians distinguish government debt, government-guaranteed debt and broader public debt — and why surprises in the energy sector, where state companies borrow against future payments, have a habit of migrating onto the sovereign's books. The SBP's external debt statistics and the Economic Survey lay out the categories; when comparing figures between sources, always check which definition is being used, because "Pakistan's debt" can legitimately mean several different totals.
At what price: reading the cost of debt
The price of government borrowing is not one number. Short-term domestic paper prices near the policy rate; long-term PIBs add a premium for locking money away; National Savings rates are set by formula and politics; concessional multilateral loans carry low, often fixed, charges; Eurobonds carry a coupon set at issuance plus a market yield that moves every day thereafter. Two summary measures help. The average cost of debt — total interest paid divided by the stock — shows what the accumulated borrowing actually costs per year, and rises only gradually as old cheap debt matures and is refinanced at new rates. The maturity profile shows when principal must be repaid: a debt stock bunched into the next two years is dangerous at any average cost, because it must be rolled over in whatever mood markets are in that season.
Currency composition is the third lens. Every depreciation of the rupee raises the rupee value of external debt and of its interest bill in the budget, even if not one new dollar was borrowed — a valuation effect that has added strikingly to reported debt totals in depreciation years, and one reason raw year-to-year jumps in the debt stock must be read carefully. Conversely, inflation quietly taxes domestic lenders, including every National Savings holder, by eroding what repaid rupees will buy. Debt sustainability analysis, of the kind the IMF publishes for Pakistan, is essentially a structured argument about these forces: growth, interest rates, exchange rates and the primary budget balance, projected forward.
One more category deserves attention because it is so often misunderstood in headlines: debt owed by public sector enterprises and guaranteed borrowing. When a state-owned company borrows from banks with a government guarantee, the loan does not always appear in the simplest headline figure for government debt, yet if the company cannot pay — as energy companies caught in payment arrears often cannot — the guarantee converts the company's problem into the taxpayer's. Analysts who track only the narrowest debt definition therefore underestimate the state's true exposure, while analysts who add every public and private foreign liability together overstate what the government itself owes. The SBP and the Ministry of Finance publish reconciliations between the definitions; the few minutes it takes to learn which total a news report is quoting will save you from most of the confused arguments about Pakistan's debt that circulate after every data release.
Why investors live inside this story
Government debt is the PSX's invisible hand. Its yields set the discount rate in every valuation model: when PIB yields are very high, a share must promise exceptional returns to compete with a "risk-free" alternative, and price-to-earnings ratios compress across the market; when yields fall, the same earnings support higher prices. Its absorption of bank lending shapes how much credit reaches listed companies and at what cost. Its interest bill determines how much fiscal room exists for development spending, subsidies or tax relief that affect company earnings. And its external portion governs the currency and reserves backdrop against which foreign investors decide whether to participate in the market at all.
None of this requires memorising the stock of debt on any given date. It requires knowing where to look — the SBP's debt and external statistics, the Ministry of Finance's debt policy and fiscal operations releases, and IMF country documents — and knowing which questions to ask of any headline: domestic or external, short or long, at what cost, due when, and guaranteed by whom. Those five questions convert a frightening single number into a map, and maps are what investors can actually use.
This article is educational content, not financial advice. It states no current debt total, yield or rate as fact, because they move with every auction and release; consult the SBP and the Ministry of Finance for the current official statistics.
Key takeaway: Pakistan's government borrows in rupees from its own banks and savers and in dollars from multilateral, bilateral and market lenders abroad — the mix of currency, maturity and price across those creditors, not the headline total alone, decides how heavy the debt really is.
