Govt Retires Rs. 1.13 Trillion SBP Debt Ahead of Time

The federal government on Sunday announced it had retired Rs. 1.133 trillion worth of debt owed to the State Bank of Pakistan (SBP), marking one of the largest single repayments in the country’s fiscal history. According to the Ministry of Finance (MoF), the repayment was executed on August 29 by the Debt Management Office and follows an earlier Rs. 500 billion repayment on June 30. In total, the government has cleared Rs. 1.633 trillion in just 59 days and more than Rs. 2.6 trillion over the past year. The MoF said the early repayments were made possible by record profits of the central bank, driven by historically high interest rates, and by a 186 percent jump in federal revenues during FY2024-25, of which Rs. 2.5 trillion came from SBP’s surplus profit. The government said the repayments marked a decisive shift towards fiscal discipline. “Including both the central bank and commercial portions, the total early debt retirement in less than one year now comes to over Rs2.6 trillion, an unprecedented scale and decisive action in Pakistan’s fiscal history,” the ministry stated. The ministry said about 30 percent of central bank debt, originally maturing in 2029, had now been retired early, reducing the government’s outstanding debt to SBP from Rs. 5.5 trillion to Rs. 3.8 trillion. It claimed this improved fiscal space, reduced refinancing risks, and increased the average maturity of domestic debt to 3.8 years from 2.7 years in FY24, “the sharpest single-year improvement in history, and well ahead of IMF targets.” Falling interest rates also helped the government secure savings of nearly Rs. 800 billion, which otherwise would have added to the tax burden, it added. Looking ahead, the government’s Medium-Term Debt Management Strategy (MTDMS 2026–28) focuses on shifting towards longer-tenor fixed-rate and zero-coupon bonds to curb refinancing and interest rate risks, as well as gradually repaying SBP-held securities before FY2029. With IMF approval, any windfall from SBP dividends exceeding 1 percent of GDP will also be used for debt retirement. The ministry acknowledged, however, that the cost of domestic debt remains elevated. While external debt carries an average interest rate of just 4.4 percent due to concessional financing, domestic debt averages 15.82 percent, pushing interest payments to nearly 6 percent of GDP in FY2025. With nearly 80 percent of domestic debt subject to re-fixing in FY2026 and a heavy reliance on floating-rate instruments, the MoF admitted interest rate risk remains high. The average time to re-fixing stands at just 1.2 years for domestic debt, compared to 4.5 years for external obligations. Despite the challenges, the ministry insisted that early repayments, a lengthening of debt maturity, and a more disciplined borrowing approach have strengthened fiscal resilience and credibility.