Govt clears Rs1.633 trillion SBP debt in 59 days

ISLAMABAD: The government has cleared another Rs1.133 trillion of its debt to the State Bank of Pakistan (SBP), reducing its central bank liabilities to the lowest in recent years. Officials said the repayment was made possible by record profits posted by the SBP, driven by historically high interest rates.

In a statement, the Ministry of Finance said the Debt Management Office executed the repayment on August 29, adding to an earlier Rs500 billion clearance made on June 30.

With these two transactions, the government has paid back Rs1.633 trillion in just 59 days. Over the past 12 months, the total early repayments have touched Rs2.6 trillion, a figure the ministry described as “unprecedented in Pakistan’s fiscal history.”

Shift from borrowing to repayment

The ministry highlighted that these repayments signal a major departure from the past, when rising borrowing costs crowded out fiscal space.

Officials said the government had now adopted a “debt discipline” strategy, under which 30 percent of its SBP borrowings were retired well before their 2029 maturity. As a result, debt owed to the central bank has dropped to Rs3.8 trillion from Rs5.5 trillion.

The MoF explained that this early clearance has also improved the country’s debt profile. The average maturity of domestic debt has increased to 3.8 years from 2.7 years in FY24, the sharpest annual improvement on record and well above targets agreed with the IMF.

According to the ministry, these steps have strengthened fiscal resilience while also securing about Rs800 billion in savings, thanks to falling interest rates. Without these repayments, the burden would have eventually fallen on taxpayers.

Boost from record revenues

The government attributed this repayment capacity to a surge in revenues, which grew by 186 percent in FY2024-25. The bulk of the increase came from the SBP’s record surplus profits of Rs2.5 trillion, which were channelled back into debt retirement.

Looking ahead, the Medium-Term Debt Management Strategy sets out plans to expand the issuance of long-term instruments, including fixed-rate and zero-coupon bonds.

Officials said these would help reduce refinancing and interest rate risks, while also attracting institutional investors such as insurers and banks. A two-year zero-coupon bond, introduced recently, has already drawn strong demand.

Debt challenges remain

Despite these gains, the MoF admitted that domestic borrowing costs remain a concern. Interest payments absorbed nearly 6 percent of GDP in FY2025, with domestic debt carrying an average interest rate of 15.82 percent compared to 4.4 percent on external loans.

Officials said about 80 percent of domestic debt will need to be re-priced by FY2026, reflecting the shift in recent years to floating-rate instruments. The reliance on such debt grew during FY2023, when the policy rate peaked at 22 percent and investors favoured five-year floating-rate Pakistan Investment Bonds.

While risks remain, the government insists its proactive approach to debt retirement has created much-needed fiscal breathing room and signalled a break from heavy borrowing practices of the past.