ISLAMABAD, Oct 23 (Wealth Pakistan): Pakistan’s lack of structured interest rate and yield curve forecasting models has significantly weakened its fiscal management, budget credibility, and debt sustainability, according to an official analysis available with Wealth Pakistan.
The report warns that the government’s continued reliance on ad hoc or judgment-based assumptions for projecting interest rates has led to frequent miscalculations, inflated debt servicing costs, and diminished market confidence.
Data from the Ministry of Finance shows that between FY2020–21 and FY2024–25, the government consistently underestimated actual interest payments, with deviations ranging between 4% and 12% above budget estimates. The most pronounced gap occurred in the foreign debt segment, where actual costs exceeded projections by as much as 44% in FY2023–24.
These repeated discrepancies, the analysis notes, expose fiscal planning to unanticipated market shifts and erode the credibility of budgetary forecasts.
Ad Hoc Planning Weakens Fiscal Coordination
The report further points out that the absence of systematic forecasting disrupts coordination between fiscal and monetary authorities, increasing the risk of pro-cyclical fiscal behaviour. Without reliable forward-looking models, the Ministry of Finance cannot conduct sensitivity analyses or simulate yield curve scenarios—tools vital for managing refinancing and interest rate risks.
As a result, Pakistan’s debt issuance strategy remains reactive rather than strategic. Government decisions on Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) often hinge on short-term market conditions, resulting in suboptimal maturity profiles and higher borrowing costs.
Impact on Fiscal Credibility and Debt Strategy
This analytical weakness, the report observes, undermines the credibility of key fiscal documents such as the Medium-Term Debt Strategy (MTDS) and the Statement of Fiscal Risks, both of which rely on data-based projections and scenario analyses.
A major structural shift in domestic debt composition occurred in September 2024 when a reduction in the policy rate—from 22% to 17.5%—led to increased issuance of long-term instruments such as PIBs and Ijarah Sukuk. By May 2025, the policy rate had fallen further to 11%, lengthening the average maturity of public debt.
However, the report cautions that this transition may have been premature, given continued uncertainty over future interest rate trends.
Call for Data-Driven Forecasting Models
Despite strong investor demand for short-term T-bills during this period, the government rejected excess bids and prioritised long-term borrowing. Data from the State Bank of Pakistan (SBP) indicates that these choices reflected prevailing market expectations about future rate movements and the yield curve’s shape.
The episode, the report concludes, underscores the urgent need for a robust, data-driven forecasting framework for interest rates and yield curves. Establishing such a model would help policymakers make evidence-based decisions, aligning fiscal operations with macroeconomic stability and improved risk management.