• MoF says Rs1.133tr repaid on Aug 29, on top of Rs500bn cleared in June; total early repayments cross Rs2.6tr
• Central bank debt reduced to Rs3.8tr from Rs5.5tr; average domestic debt maturity rises to 3.8 years
• Falling interest rates saved Rs800bn in FY25, easing taxpayer burden
ISLAMABAD: The government on Sunday said it had retired about Rs1.133tr debt to the State Bank of Pakistan (SBP), taking advantage of the central bank’s record profits[1] driven by the highest interest rates in the country’s history.
“On August 29, 2025, the Debt Management Office (of the Ministry of Finance) executed another monumental repayment of Rs1.133 trillion,” the Ministry of Finance (MoF) said in a statement, adding that this came on top of an earlier Rs500bn repayment on June 30, 2025. The total repayment, therefore, amounted to Rs1.633tr in just 59 days, and Rs2.6tr in about a year.
The government had earlier announced in November last year that it had retired Rs1.867tr against a borrowing of Rs753.2bn for budgetary support in FY2023-24 through earlier repayments and buybacks of its securities from the market. “The MoF had, in the first half of FY25, retired domestic commercial market debt of Rs1tr — the first such advanced debt retirement operation in Pakistan’s history,” the statement said, adding that “including both the central bank and commercial portions, the total early debt retirement in less than one year now comes to over Rs2.6tr— an unprecedented scale and decisive action in the country’s fiscal history.”
The MoF said the early debt retirement was part of government efforts to strengthen public finances through early repayments and restore fiscal credibility. It marked a decisive shift from past debt-heavy practices, where reliance on borrowing crowded out fiscal space and increased risks. The ministry said the government had now initiated debt discipline under which 30pc of central bank debt was retired ahead of its maturity in 2029. As a result, government debt to the SBP dropped to Rs3.8tr from Rs5.5tr, thereby reducing risks and improving fiscal space.
Consequently, fiscal resilience had strengthened, the MoF maintained, adding that “the average maturity of domestic debt has risen to 3.8 years from 2.7 years in FY24 — the sharpest single-year improvement in history, and well ahead of IMF targets.”
The statement acknowledged that falling interest rates helped secure about Rs800bn in saving that would have otherwise put an additional tax burden on taxpayers.
Earlier, the government had said the pre-mature debt retirement was possible because of 186pc growth in federal revenues. The unprecedented increase in revenues in FY2024-25 was mainly driven by the surplus profit of the SBP (Rs2.5tr).
The government’s recent Medium-Term Debt Management Strategy (MTDMS 2026-28) emphasises increasing net issuances of PIBs, fixed-rate and zero-coupon bonds to help lower refinancing and interest rate risks. The strategy also seeks gradual repayment of securities held by the SBP to reduce refinancing risk in FY2029.
With IMF consent, the plan will be supported by “utilising any windfall from SBP dividends exceeding 1pc of GDP for the retirement of SBP debt,” the MoF said, adding that demand from long-term institutional investors was also expected to support this shift. Longer-dated zero-coupon bonds would suit their liability structures, it said, noting that the recently introduced two-year zero-coupon bond had already attracted strong interest from both commercial banks and insurers. Increased issuance of this instrument was therefore envisaged under the MTDMS.
The MTDMS conceded that the cost of debt in FY2025 remains elevated, particularly for domestic borrowing. The overall weighted average interest rate stands at 11.9pc, driven largely by the significantly higher cost of domestic debt relative to external sources.
While external debt carries a much lower weighted average interest rate of 4.4pc — reflecting the high share of concessional and semi-concessional financing — domestic debt bears an average rate of 15.82pc. As a result, interest payments consumed nearly 6pc of GDP in FY2025.
According to MoF, interest rate risk is high for domestic debt, reflecting a shift to floating-rate domestic debt instruments in response to market demand in recent years, primarily due to a growing reliance on floating-rate instruments in response to market preferences, the ministry said.
This trend was particularly evident in FY2023, when investors showed a strong preference for short- to medium-term floating-rate Pakistan Investment Bonds (PIBs), notably the five-year tenor with semi-annual coupons. “This shift was driven by expectations of continued interest rate hikes and a high policy rate environment, which peaked at 22pc during FY2023,” the ministry added.
Nearly 80pc of domestic debt is subject to an interest rate re-fixing in FY2026, with an average time to re-fixing (ATR) of only 1.2 years. For external debt, ATR is higher at 4.5 years, reflecting a greater share of fixed-rate debt, it added.
Published in Dawn, September 1st, 2025
References
- ^ record profits (www.dawn.com)