Govt to launch Sustainable Finance Framework, saving Rs1tr on debt servicing

January 28, 2025 (MLN): The Debt Management Office is developing a Sovereign Sustainable Finance Framework for international capital market issuances, designed to channel capital into projects that will support climate adaptation, enhance social equity, and stimulate green economic growth.

The government’s prudent debt management strategies are expected to yield substantial benefits, with projected savings of over Rs1 trillion on debt servicing in the current fiscal year.

A strong emphasis has been placed on expanding the range of instruments to cater to different investor preferences, as revealed in the half-yearly report, "State of Pakistan's Economy," by the Finance Division.

This includes the introduction of Shariah-compliant instruments such as long-term fixed and variable-rate Sukuks, aimed at boosting the share of Islamic financing in government securities to 15% by FY2026 from 11% in FY2024.

Furthermore, the government has focused on sustainable financing options, such as issuing domestic green Sukuks and asset-light Sukuks, to support environmentally sustainable projects while broadening the investor base.

The government aims to carry out the issuance of Domestic Listed Green Sukuk during CY25.

The government is exploring additional external financing options, including accessing the international bond market and securing commercial loans.

In this context, it is set to issue its first-ever Panda Bond in the Chinese market, capitalizing on the lower yields and costs offered in that market.

The government is taking measures to reform the fiscal sector by broadening the tax base, strengthening fiscal institutions, and ensuring long-term debt sustainability.

Moreover, the efforts are geared towards improving federal-provincial institutional arrangements to enhance revenue generation from diversified sources.

An important development is the reorganization of federal-provincial fiscal relations through the National Fiscal Pact, which is essential for enhancing overall revenue mobilization.

The fiscal performance indicates positive developments in revenue collection and expenditure management.

During Jul-Dec FY2025, FBR tax collections realized a significant increase of 25.9% YoY, reaching Rs5,624.9 bn, up from Rs4,469.2bn.

This growth was broad-based, driven by direct and indirect taxes.

Figure 1: FBR tax collection (Rs billion) Jul-Dec

Direct taxes rose to Rs2,781.6bn, compared to Rs2,148.9bn in the same period last year, while indirect taxes encompassing sales tax, customs duties, and federal excise duty increased to Rs2,843.3bn, up from Rs2,320.4bn.

During Jul-Nov FY2025, non tax revenues increased by 95%, reaching Rs3,417.7bn, up from Rs1,757.2bn last year.

This remarkable growth was broad-based, driven by higher receipts from dividends, PTA profit, passport fee, royalties on oil/gas, natural gas development surcharge and petroleum levy.

Moreover, SBP contributed a significant surplus profit of Rs2,500bn.

The exceptionally high profit stemmed from the elevated interest rates throughout FY2024.

The expenditure increased by 16.0% to Rs5,604.7bn in Jul-Nov FY2025 from Rs4,831bn last year.

Current expenditure rose by 16.3%, reaching Rs5,480.4bn, while PSDP expenditure increased to Rs124.3bn representing a growth of 4.0 % YoY.

The reduction in interest rates, driven by the policy rate cut, dampened the rise in markup payments to a moderate 16.3% during Jul-Nov FY2025, compared to a sharp 74% surge last year, signaling easing fiscal pressures.

The fiscal deficit is recorded at 0.04 % of GDP (Rs43.5bn) during Jul-Nov FY2025 significantly lower than the 1.3 % (Rs1,375.4bn) last year.

Furthermore, the primary surplus continued to improve owing to contained growth in non-markup spending and reached Rs3349.7bn (2.7% of GDP) during Jul-Nov FY2024 from Rs1542.1bn (1.5% of GDP) last year.

This improvement was driven by higher revenues, both tax and non-tax, which outpaced the growth in expenditure, alongside contained growth in non-mark-up spending.

The robust primary balance highlights improved fiscal management and reinforces the government’s commitment to reducing reliance on borrowing while upholding fiscal discipline.

The government’s debt management strategy helped in reducing the public debt-to-GDP ratio to 67.5 % at end-Jun’24 (74.9 % of GDP at the end of June 23), the lowest level in the past five years.

During Q1FY2025, public debt observed a marginal increase of 1.3 % to Rs72,138bn compared to a growth of 2.43 % in Q1FY2024.

The debt-to-GDP ratio is projected to follow a downward trajectory, driven by prudent debt management and fiscal consolidation efforts.

The ongoing stabilization reforms and improved macroeconomic indicators have positively impacted Pakistan’s international bonds.

Yields on Pakistan’s Eurobonds and Sukuks, which peaked above 60% in 2023, have steadily declined and are now hovering in the 10-11% range, reflecting enhanced investor sentiment and a reduction in perceived risk.

The government has implemented a range of key strategies to strengthen debt management and ensure fiscal sustainability.

These measures include prioritizing long-term debt issuance to reduce refinancing risks, reprofiling existing debt to extend maturities, and diversifying financing sources to secure low-cost funding.

The government has reduced its reliance on short-term instruments to reduce refinancing and gross financing needs in the short term, thereby reducing rollover risk.

This strategy has facilitated the long-term profiling of debt, increasing the average time to maturity from 2.81 years in June 2024 to 3.3 years by December 2024.

By purchasing Rs1,026bn worth of T-bills through three liability management operations, the government has achieved immediate savings of Rs31bn.

This strategic move not only reduces the government’s debt burden but also influences the long-term cost of debt through effective yield curve management.

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