What It Means for the Economy

Overview:

Pakistan is expected to repay nearly $23 billion in external debt during FY 2025, a challenge that brings wide-ranging implications for the country’s economy, businesses, and individuals. This figure includes principal repayments, interest obligations, and short-term borrowings that need refinancing.

What’s in the Numbers?

• Total external debt servicing (FY25): $23 billion
• Foreign exchange reserves (as of Aug 2025): ~$9 billion
• Expected inflows (loans, aid, multilateral support): Uncertain
• Current account deficit (2025 forecast): $4–5 billion

Economic Implications:

Business Financing Crunch:

With the looming $23 billion external debt repayment, Pakistan faces heightened sovereign risk. When sovereign risk rises, lenders and investors demand higher returns to compensate for uncertainty. This directly translates into higher interest rates on loans and bonds. As a result, private businesses, especially SMEs and startups, may find it difficult to access affordable financing. Expansion projects, new investments, and even working capital needs could stall due to the high cost of borrowing.

Currency Depreciation Pressure:

Low foreign exchange reserves against large repayment obligations create a supply-demand imbalance for USD. This exerts downward pressure on the Pakistani Rupee (PKR). A weaker PKR means higher import bills, especially for essential goods such as petroleum, machinery, and raw materials. Businesses reliant on imports face shrinking margins, while consumers encounter higher prices for imported products. The ripple effect can also push up the cost of production in industries like textiles, manufacturing, and energy.

Inflationary Ripple:

A debt-driven currency depreciation is likely to trigger imported inflation. Since Pakistan imports a significant portion of its fuel, edible oil, and raw materials, its costs would surge. This increase feeds directly into consumer prices, raising electricity tariffs, transport fares, and food prices. The inflationary cycle disproportionately hurts low- and middle-income households, reducing purchasing power and potentially increasing poverty levels. For businesses, it raises operational expenses, compressing profit margins.

Investor Confidence Impact:

Large debt obligations without clear repayment strategies can prompt credit rating downgrades by global agencies. Such downgrades erode international investor confidence. Foreign Direct Investment (FDI) inflows may slow down as investors look for safer markets, and portfolio investments may exit due to volatility. This deters long-term private sector growth, reduces technology transfer opportunities, and slows down job creation in key industries.

Tax Burden Risks:

To bridge fiscal gaps, the government may resort to new or higher taxes on businesses and individuals, or roll back existing subsidies. This could include higher sales taxes, petroleum levies, or energy tariff adjustments. While such measures provide short-term relief for state finances, they raise the cost of living and operating costs for businesses. Companies may pass on the burden to consumers, further fueling inflation. The tax squeeze could also discourage entrepreneurship and stifle business growth.

Strategic Outlook:

• Pakistan must pursue debt restructuring, IMF program continuity, and boost exports while controlling non-essential imports.
• Diversifying revenue and investing in productivity-enhancing sectors like IT, agriculture, and services are crucial.

Sources:

• Reuters
• Pakistan Today