Debt ceiling breach signals fiscal risk

EDITORIAL: The latest Debt Policy Statement 2026, prepared under the Fiscal Responsibility and Debt Limitation (FRDL) Act for submission to the National Assembly, once again tells the story of the country’s fiscal rulebook being treated as optional.

According to the statement, in FY2024-25, public debt overshot the statutory ceiling by a staggering Rs16.8 trillion, climbing to 70.7 percent of GDP against a maximum permissible cap set by parliament of 56 percent.

In other words, public debt exceeded the legal limit by a substantial 14.7 percent of GDP, demonstrating the government’s continued failure to impose fiscal discipline on itself.

It goes without saying that this breach exposes a deep-seated structural flaw in Pakistan’s system of governance: spending first, borrowing more to finance that expenditure and retrofitting justifications later.

Rules intended to impose fiscal discipline are routinely ignored, with Parliament usually looped in only after ceilings are crossed and the executive facing no immediate consequences for excess. It is clear that the state’s core operating model remains consumption-driven, resistant to reform, overly reliant on debt and indifferent to enhancing the economy’s productive capacity.

The cumulative effect of this is that half the federal budget is now swallowed by debt servicing, shrinking space for development spending, hollowing out the PSDP (Public Sector Development Programme) and forcing ever-higher taxes on an already overburdened citizenry.

Just last month, a leading think tank had highlighted the scale of Pakistan’s debt crisis: between FY2015 and FY2025 public debt ballooned by a massive 365 percent, surging from Rs17.3 trillion to Rs80.5 trillion, with debt servicing costs comfortably outpacing revenue growth during the past decade.

Equally alarmingly, domestic debt servicing had emerged as the biggest driver of expenditure growth over the last three years, crowding out development outlays and starving the economy of the productive investment needed to break the debt trap. Against this bleak backdrop, the finance ministry’s assurances to Parliament ring hollow.

Even as it concedes that the debt-to-GDP ratio worsened over the last fiscal year, the government maintains that it remains committed to following the FRDL Act and promises to reduce public debt to sustainable levels through fiscal consolidation, generating primary surpluses and a gradual reduction in the fiscal deficit.

How this is to be achieved is far from clear as the Fiscal Policy Statement 2026 shows that the federal fiscal deficit also exceeded the parliament-set limit by 2.7 percent of GDP, underscoring that both core fiscal anchors — debt and deficit — have been breached simultaneously, leaving little credibility in claims of a near-term turnaround.

Early signs this year aren’t too encouraging. The FBR has already missed its revenue target for the July-January period by Rs347 billion, even as the government leans more heavily on financial engineering to contain debt pressures.

The current strategy focuses on lengthening maturities through greater issuance of medium- and long-term instruments, shifting towards fixed-rate debt, deepening the domestic market and tapping new investors at home and abroad, including through proposed Panda bonds.

While these steps may ease refinancing and interest-rate risks in the short term, they leave the underlying imbalance intact: a government that continues to spend beyond its means and fails to raise sufficient revenue. Without correcting this gap, debt management will merely defer the reckoning rather than placing public finances on a sustainable footing.

The reality is that until the mindset at the heart of governance changes, fiscal indiscipline will remain deeply entrenched.

Departments will continue to exceed their budgets, state spending will favour consumption over productive investment, the burden of pensions will swell and the civil bureaucracy will remain bloated.

The government will find itself borrowing not only to cover towering existing debt but also to finance these ongoing obligations, creating a self-perpetuating cycle that thwarts any meaningful attempt at fiscal reform.

Copyright Business Recorder, 2026