Domestic debt servicing jumps to nearly Rs7 trillion as years of heavy government borrowing deliver another record payday for banks
KARACHI: Pakistan’s banking sector is poised for another windfall as the federal government is expected to pay an unprecedented Rs6.98 trillion in interest on domestic debt during the fiscal year 2026-27, exposing the massive cost of years of aggressive government borrowing.
Budget documents reveal that the government has earmarked nearly Rs7 trillion in mark-up payments to domestic financial institutions next year, representing a staggering increase of almost Rs1 trillion from the Rs6 trillion allocated in the outgoing fiscal year.
The massive interest burden highlights the growing strain of Pakistan’s debt-driven fiscal model, where the government continues to rely heavily on commercial banks to finance budget deficits, diverting enormous public resources toward debt servicing instead of development spending.
Economic experts warn that the soaring debt-servicing bill comes despite a significant reduction in borrowing costs over the past two years. The State Bank of Pakistan (SBP) had slashed its benchmark policy rate from a historic high of 22 percent to 10.50 percent, although it was recently increased to 11.50 percent.
Analysts argue that the rise in interest payments despite lower policy rates reflects the sheer size of the government’s domestic debt stock, which has expanded rapidly in recent years due to persistent fiscal deficits and mounting financing needs.
“The debt burden has reached a level where even lower interest rates are unable to significantly reduce the government’s financing costs,” said a financial market expert. “The volume of debt is simply too large.”
The upcoming fiscal year’s debt-servicing projections indicate that the banking sector will remain one of the biggest beneficiaries of government borrowing. Higher interest receipts are expected to further strengthen the profitability and balance sheets of banks and other financial institutions.
Overall, the government’s total mark-up payments—including both domestic and foreign debt—are projected to surge to Rs8.05 trillion in fiscal year 2026-27, compared with Rs6.94 trillion in the current fiscal year.
Meanwhile, interest payments on foreign debt are estimated to reach Rs1.07 trillion, up from Rs931 billion this year, adding further pressure on Pakistan’s already stretched fiscal position.
The ballooning debt-servicing cost means that a substantial portion of federal revenues will continue to be consumed by interest payments, leaving limited fiscal space for infrastructure development, social welfare programs, education, and healthcare.
With debt repayments consuming record levels of government resources, economists are increasingly questioning the sustainability of Pakistan’s borrowing strategy and warning that meaningful fiscal reforms will be essential to prevent the debt burden from spiraling further out of control.
