Domestic debt rises despite State Bank’s profit injection

Islamabad’s domestic debt ballooned by a staggering 2.5 trillion rupees in the first half of Fiscal Year (FY) 2024-25. According to reports, the federal government has had to rely on credit to finance state operations despite the State Bank of Pakistan (SBP) sharing its profits with the government.

As per data from the SBP, the government’s domestic debt surged from a controlled 47.724 trillion rupees at the start of FY 2024-25 to a whopping 50.193 trillion rupees by the end of December 2024.

Analysts have grown worried as debt rose in the first half of the current FY, even with the SBP lending its support to Islamabad for budgetary purposes. More concerningly, rising debt levels indicate Islamabad’s possible deviation from the International Monetary Fund (IMF) 's prescribed austerity measures, as the federal government is not strictly holding a contractionary fiscal policy.

While it may seem that the SBP’s 2.7 trillion rupee profit would help the government’s finances, reports claim that debt levels rose instead. Analysts outline how the supply of liquidity allowed borrowing levels to remain controlled despite earlier estimates predicting Islamabad would incur a lower amount of debt.

According to data, the growth in debt can be attributed to low revenue collection levels coupled with a rise in government expenditures. With respect to revenue, the FBR fell short of its revenue target by a colossal 386 billion rupees in January 2025.

As per reports, the shortfall can be attributed to a fall in tax receipts. The use of technology could significantly streamline FBR processes, allowing officials to achieve the revenue target for fiscal year (FY) 2024-25, which currently sits at an ambitious 12.9 trillion rupees.

However, for now, revenue shortfalls require the government to borrow money to plug the federal budget deficit. In an effort to shield the economy from the growing debt burden, Finance Minister Muhammad Aurangzeb is attempting to expand the tax net and improve revenue collection levels – which could reduce the government’s dependence on loans.

While growing debt levels might seem threatening at first glance, the government appears to have raised these funds on somewhat beneficial terms. During the first half of FY 2024-25, the government issued long-term debt via auctioning ‘Pakistan Investment Bonds’, as this will result in infrequent payments to creditors.

Banks purchased these bonds that had longer maturity periods because of falling interest rates. Interest rates have plummeted by a staggering 1,000 basis points in the past seven months as the SBP slashed interest rates after enjoying successes in its battle against inflation.