The Debt Trap Explained: Why Pakistan Borrows to Pay Its Own Interest
How a primary surplus and a large deficit can exist at the same time
By the ISN Media desk • June 2026 • Approx. 8-min read
One of the more confusing features of Pakistan's budget is that the government takes in more than it spends on its day-to-day affairs, and yet still runs a large deficit. The explanation lies in the cost of old debt, and in a figure called the primary balance. This explainer sets out how the debt trap works, in plain steps. The figures are Budget Estimates from the Government of Pakistan, in billions of rupees. It sits under the pillar the 43 percent, how debt interest consumes Pakistan's budget.
What is a debt trap, and what is a primary surplus?
A primary surplus means the government takes in more than it spends before counting interest, and Pakistan's primary surplus in 2026-27 is about Rs 2,828 billion. A debt trap is the situation that results when, despite that surplus, the government must still borrow to pay the interest on debt it already owes, so the total deficit persists and the debt keeps growing. In other words, Pakistan's deficit exists almost entirely because of interest on old debt, not because of day-to-day overspending.
That single idea is the key to the whole budget. The rest of this article unpacks it.
The primary balance, defined
The primary balance is the budget once interest has been set aside. It compares the government's revenue with all of its spending except interest. If revenue is higher, there is a primary surplus; if spending is higher, a primary deficit.
| Balance measure | FY 2025-26 | FY 2026-27 | Change |
|---|---|---|---|
| Federal budget deficit | 6,501 | 7,020 | +8.0% |
| Primary surplus (overall) | 3,170 | 2,828 | -10.8% |
| Overall fiscal deficit (percent of GDP) | 3.9% | 3.6% | -0.3 |
Figures in billions of rupees, except the deficit ratio.
Pakistan's primary surplus of about Rs 2,828 billion tells you that, before interest, the government is living within its means and a little more. The deficit appears only when the interest bill of about Rs 8,054 billion is added back in. This is why analysts watch the primary balance: it shows whether the underlying budget is disciplined, separate from the inherited cost of debt.
How the trap works, step by step
Follow the figures around once. The centre keeps about Rs 11,751 billion of its own revenue after paying the provinces. It owes about Rs 8,054 billion in interest. So before it funds defence, pensions, salaries, subsidies or any development, roughly two-thirds of its retained revenue is already committed to interest.
What remains cannot cover current spending of about Rs 17,495 billion, let alone build anything. The gap is met by borrowing. That new borrowing is added to the existing debt. Next year, interest must be paid on the larger pile, at whatever rate the market demands when the short-dated portion is rolled over. If the rate has not fallen, the interest line grows again, and the borrowing required to fill the gap is larger still. This is the loop, and it tightens on its own.
Why the primary surplus shrank
The primary surplus actually fell this year, from about Rs 3,170 billion to Rs 2,828 billion, a decline of about 11 percent. That matters because the primary surplus is the cushion that, in principle, pays the debt burden down over time. A smaller surplus means a thinner cushion. The overall fiscal deficit still eased slightly as a share of the economy, to about 3.6 percent of GDP, but that improvement is modest and leans partly on the assumption that interest rates will ease over the year rather than on the debt itself shrinking.
A worked example over two years
To see how the trap tightens, follow a simplified two-year sketch using the budget's own logic. In the first year, the government runs a primary surplus but still faces a large interest bill, so it borrows to cover the shortfall. That borrowing is added to the debt stock.
In the second year, interest is now due on the larger stock. If the interest rate has stayed the same or risen, the interest bill grows, the shortfall after the primary surplus widens, and the government must borrow even more. The primary surplus would have to grow substantially each year just to stop the debt rising, and grow further still to bring it down. This is why a single year of discipline does not break the cycle, and why economists describe the position as a trap rather than a temporary deficit. Only a sustained combination of lower rates, a larger surplus and faster growth changes the trajectory.
Why the distinction matters for judging a budget
The primary balance matters because it separates two very different questions. The first is whether a government is living within its means today, which the primary balance answers: Pakistan's primary surplus says it broadly is, before interest. The second is whether the inherited debt is sustainable, which the overall deficit and the debt stock answer, and here the picture is harder.
Confusing the two leads to mistaken conclusions. A commentator who looks only at the overall deficit might conclude the government is overspending on services, when in fact the deficit is almost entirely the cost of past borrowing. A commentator who looks only at the primary surplus might conclude the problem is solved, when the debt is still growing. Reading both together is what gives an accurate picture.
What breaks the trap
A debt trap loosens only when one of three things happens. The interest rate falls, which reduces the cost of rolling over the debt; the primary surplus grows, which provides more to pay the burden down; or the economy grows faster than the debt, which shrinks the burden relative to national income.
Of these, the rate is the most powerful single lever in the short term, and it depends on sustained lower inflation. None of them allows the deficit to close quickly, which is why economists describe Pakistan's position as a structural problem rather than one a single budget can solve. The bank borrowing that fills the gap each year is examined in bank borrowing doubled, the 103 percent jump, and the composition of the debt in domestic vs foreign debt.
Frequently asked questions
What is a primary surplus? A primary surplus is when the government takes in more than it spends before counting interest. Pakistan's is about Rs 2,828 billion in 2026-27, which shows the day-to-day budget is disciplined even though the overall budget is in deficit.
How can Pakistan have a surplus and a deficit at the same time? The surplus is the primary balance, which excludes interest. The deficit appears once the interest bill of about Rs 8,054 billion is added back. So the deficit exists almost entirely because of interest on old debt.
What is the debt trap? The situation where a government must borrow to pay the interest on debt it already owes, so the debt keeps growing despite a disciplined primary budget. Each year's new borrowing adds to next year's interest.
Is Pakistan's deficit improving? Modestly. The overall fiscal deficit is targeted at about 3.6 percent of GDP, down from 3.9 percent, but the primary surplus shrank, and the improvement depends partly on interest rates easing.
How does Pakistan escape the debt trap? Through a lower interest rate (driven by lower inflation), a larger primary surplus, or growth faster than the debt. None works quickly, which is why the problem is described as structural.
Why can't the government just spend less to close the deficit? It already runs a primary surplus, meaning it spends less than it earns before interest. The deficit is driven by the interest bill, which is a legal obligation on past debt and cannot be cut in a single year.
Does a primary surplus reduce the debt? Not by itself. The surplus must be large enough to cover the interest bill before the debt stops growing, and larger still before it falls. Pakistan's primary surplus shrank this year, so the cushion available to reduce the burden got smaller.
What is the difference between the federal deficit and the overall fiscal deficit? The federal deficit is the centre's own gap; the overall, or consolidated, fiscal deficit also accounts for provincial balances. The overall deficit is targeted at about 3.6 percent of GDP, while the federal-only figure is the larger Rs 7,020 billion.
Sources and notes
- Government of Pakistan, Federal Budget 2026-27: primary balance, deficit and interest figures are Budget Estimates in billions of rupees, rounded for readability.
- Note: the primary surplus relates to the overall (consolidated) fiscal balance; the federal-only deficit is a separate, larger figure because it excludes provincial surpluses.
- The definitions of the primary balance and the debt trap reflect standard public-finance usage.
ISN MEDIA