Pakistan plans to utilise hedging instruments to manage exchange rate volatility risks, while also working to develop domestic futures and interest rate swap markets, according to the “Medium Term Debt Management Strategy (MTDS) for FY 2026-28” released by the Debt Management Office, Finance Division.
“The government is committed to actively managing foreign exchange (FX) risk. There are plans to use hedging instruments to mitigate exchange rate volatility risks,” read the Medium Term Debt Management Strategy FY2026-28.
The MTDS projects that nominal GDP will rise from Rs114.7 trillion in FY 2025 to Rs162.5 trillion by FY 2028, driven by growth in the agriculture and manufacturing sectors. It also anticipates an average primary surplus of around 1% of GDP during the strategy period, in line with targets set under the International Monetary Fund (IMF) programme.
The government is committed to managing foreign exchange risk, exploring innovative instruments such as debt-for-nature swaps to reduce external debt risks. The total public debt at the end of FY 2025 is projected to be Rs78.2 trillion (USD 275.9 billion), about 68% of the estimated GDP, with an increasing reliance on domestic financing. Domestic debt’s share in total public debt has risen from around 62% in FY 2023 to 68% in FY 2025.
The MTDS highlights that the cost of domestic debt remains high, with the overall weighted average interest rate at 11.9%, driven largely by higher domestic borrowing costs. In contrast, external debt carries a much lower weighted average interest rate of 4.4%, reflecting the high share of concessional financing. Domestic debt, however, carries an average rate of 15.82%, placing significant pressure on the country’s finances, with interest payments consuming nearly 6% of GDP in FY 2025.
Refinancing risk has been reduced, with the average time to maturity (ATM) of domestic debt improving from 2.7 years in June 2024 to 3.8 years in June 2025. The ATM for external debt remains over 6.1 years. However, the shift towards floating-rate instruments in domestic debt has raised interest rate risk, as nearly 80% of domestic debt is subject to interest rate refixing in FY 2026.
The MTDS aims to rebalance the debt portfolio by relying more on longer-term, fixed-rate domestic instruments and reducing exposure to short-term, high-cost borrowing. Efforts will be made to increase net issuances of fixed-rate Pakistan Investment Bonds (PIBs), including newly introduced zero-coupon bonds for both conventional and Sharia-compliant markets, to attract long-term institutional investors.
The strategy also places emphasis on expanding Sharia-compliant instruments, aiming for them to make up over 20% of total domestic securities. The government aims to deepen the domestic capital market, limiting the issuance of floating-rate instruments and Treasury Bills (T-bills) to reduce short-term debt accumulation.
