Who Owns Pakistan’s Debt?

Pakistan’s domestic debt has increased to Rs58.1tn, an 11pc increase over the past year. Public debt stood at 70.7pc of GDP in FY25, well above the 56pc legal ceiling under the Fiscal Responsibility and Debt Limitation Act. Rs6.98tr has been budgeted for domestic mark-up alone this year, which one analyst estimates absorbs nearly 69pc of federal net revenues. Declining interest rates have taken some of the pressure off, but that is unlikely to last. The policy rate remains at 11.5 per cent, while inflation stood at 11.1 per cent in August, leaving a real interest rate of roughly 0.4 percentage points. The easy gains are over.

Much of the commentary is about how much the state owns. A more important question is to whom. By the end of June 2025, these banks owned 83% of all government securities. By March 2026, government paper was about 62% of all banking-system assets, compared with around 22% for private-sector advances. Banking banks that receive safe returns from the state don’t have much incentive to lend to riskier borrowers. And the IMF has looked at more than 120 countries and found that the link from sovereign to bank is a risk in its own right: banks will be undercapitalized after a modest restructuring. The problem is more about concentration than issuance. This is not a technical argument. If you spend a rupee on interest, you don’t have it to spend on schools, hospitals and roads, and when banks choose to lend to the government instead, it leaves small businesses and farmers to fight over the crumbs. Debt ownership determines where the credit goes.

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In July, the State Bank introduced Invest-Pak, a mobile wallet app that enables people and companies to purchase government securities directly from Rs5,000, on the background of the new rate of profit on a minimum saving deposit. From 1 August, the minimum saving profit rate will be paid to depositors with average balances up to Rs10 million. “Larger depositors have the opportunity to earn higher profit through Invest-Pak,” SBP said. Brought as two separate packages, one on inclusion and the other on bank regulation. Seen together it’s one plan: transfer ownership of indigenous debt from banks’ balance sheets to households and firms. The finance minister believes a broader investor base would enable banks to lend more to the private sector. Perhaps. But three concerns need consideration.

Invest-Pak and the new deposit-rate framework should be judged not by the number of new investors they create, but by whether they actually release bank credit for productive investment without creating new funding and rollover risks.

First, this moves the debt; it doesn’t reduce it. Because it’s a direct investment, it just alters who gets paid Rs58 trillion of stock or the Rs6.98 trillion of annual interest. If big depositors shift cash into T-bills, banks will lose cheap funding and it will be a matter of whether the Treasury pays, depending on how fierce the auctions get. Nobody has shown anyone how that slice will turn out.Secondly, funding and rollover risk. Wholesale borrowing makes up Rs16 trillion, or 27.1%, of assets, and if that shrinks so that large depositors decide to run down their borrowing, banks may be even more dependent on that fragile source of funds. Paper held directly by households and companies will also be short dated, raising rollover pressure on the Treasury. Third, a two-rate saver. Large depositors get premium rates, but most will not be aware of the availability of the Invest-Pak. Savers who know about Invest-Pak are probably the better-off of those who know about the scheme and will seek higher returns. Similar reasoning goes for overseas investors. The September Eurobond, a $3 billion offering at 7.50% for five years and 7.90% for ten years, widens the maturity spectrum and brings down short-term expenses. However, foreign-currency debt adds an element of forex risk to a note that is mostly priced in rupees.

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Reveal where the debt lies. The SBP and Finance Ministry should publish debts broken down by holders (banks, companies, people, Invest-Pak) in the monthly debt bulletin. Without this, the argument that banks will lend more is untestable; the experiment is explained but never refined. The test isn’t number of investor accounts but net private-sector lending, which has now left the advances-to-deposits ratio at less than 39%. Use deposit migration stress tests and estimate the total outflow a bank can sustain in the Financial Stability Review. Simplification of design for the small saver through the simple ladder products, inflation adjusted retail instruments, and secondary market buy back window. Maintain the fiscal anchor. Reform of ownership can’t substitute for consolidation. The burden can only be eased with a long-term primary surplus and improved taxation.

A shift in debt ownership could allow banks to lend more without needing to attract additional deposits. But if implemented too hastily or poorly, it could destabilise bank funding and push up its cost. Many economies have tried to patch their finances by bringing in new lenders. The one durable solution, however, is for the state to borrow less. Reforming debt ownership can help, but not if it comes at the expense of fiscal space. What matters is measurement: will the next step be evidence—or applause?

The writer is a fellow at SPRC. Her research interests are development studies, economics and social policy, with a focus on how public finance and debt shape households’ access to credit, savings and public services in Pakistan.