Moody’s Investors Service has projected that interest costs in Pakistan will account for nearly 40 percent of total government spending in 2025, a significant increase from around 25 percent in 2021. This finding is part of Moody’s report titled “2025 Outlook – Stable as Economic Risks Recede, geopolitical and trade risks persist,” which underscores the ongoing challenges in government debt affordability for Pakistan.

The report stated that Pakistan’s debt affordability will remain weaker than pre-pandemic levels, a situation shared by other emerging and frontier markets such as Nigeria and Egypt. Pakistan, rated Caa2 with a positive outlook, is particularly vulnerable to food security crises within the Asia-Pacific region.

Despite securing a new $7 billion program from the International Monetary Fund (IMF) to ease liquidity pressures, Pakistan faces challenges in replacing maturing sovereign debt with financing from concessional lenders. The conditions attached to new multilateral financing could also heighten social risks.

Moody’s notes that several countries, including Pakistan, will encounter significant eurobond redemptions in 2025, with local currency financing needs exceeding 10 percent of GDP. This situation poses ongoing liquidity risks, potentially leading to defaults.

In contrast, advanced economies are expected to maintain stronger debt affordability than before the pandemic, although some, like the US and France, may see significant deterioration. Greece is an exception, with continued improvements in debt affordability due to deleveraging.

The report also highlights increased global military spending driven by geopolitical tensions. European countries are boosting defense budgets to meet NATO targets, while Japan and India are also ramping up defense expenditures amid regional tensions.

Moody’s further assumes that global food prices will remain lower than in recent years, but warns that low-rated frontier markets, including Pakistan, remain highly susceptible to food security crises.