Are rate hikes deepening Pakistan's debt trap?

According to an opinion piece in The Express Tribune, issuance of semi-annual floating Pakistan Investment Bonds grew from below Rs1 trillion during 2020 to over Rs14 trillion by 2024, and now exceeds Rs22 trillion. Floating-rate instruments make up 70% of domestic sovereign debt, and the average time to refix sits just above one year.

The authors argue that each policy rate increase feeds quickly into borrowing costs, and the effect is strongest two to three quarters later, once floating securities reset in subsequent auctions. Debt servicing claims 40% of the federal budget even after three consecutive years of primary surpluses, forcing cuts to development spending.

The piece contends that Pakistan's inflation is mostly cost-push and import-driven, with currency devaluation, commodity shocks and energy tariff revisions among the main triggers. Even so, the authors accept that tighter monetary policy from the State Bank of Pakistan is needed to keep inflation expectations from spiralling. They recommend that the Debt Management Office keep raising the share of fixed-rate debt and lengthen the maturity profile, while the government addresses climate and geopolitical vulnerabilities.