As governments worldwide grapple with mounting debt and fiscal uncertainty, three nations—Pakistan, France, and Iraq—are facing distinct but equally daunting challenges in managing their public finances. Recent official reports, warnings from economic experts, and credit rating downgrades have thrown the spotlight on the delicate balancing act required to maintain stability while pursuing growth and reform.
Pakistan’s debt crisis has taken center stage in South Asia, as the country’s total public debt soared to $286.832 billion (PKR 80.6 trillion) by June 2025, according to the Ministry of Finance’s Annual Debt Review for FY25, cited by PTI. This figure marks a staggering 13 percent increase from the previous year, a pace that alarms both local policymakers and international observers. Domestic debt alone reached PKR 54.5 trillion, while external debt stood at PKR 26.0 trillion. The debt-to-GDP ratio, a key indicator of fiscal health, rose to around 70 percent—up from 68 percent a year earlier—signaling that the nation’s liabilities are outpacing its economic output.
The report attributes this rise primarily to lower-than-expected nominal GDP growth, with subdued inflation hampering economic expansion despite ongoing fiscal consolidation. Notably, the 15 percent year-on-year increase in domestic debt was the lowest in three years, but external debt still jumped 6 percent to $91.8 billion. This spike was fueled by disbursements from the International Monetary Fund (IMF), a $1 billion loan backed by the Asian Development Bank (ADB), and inflows from other multilateral agencies.
Provincial borrowing also contributed to the swelling debt figures. Punjab emerged as the largest subnational debtor with $6.18 billion (7 percent of the total), followed by Sindh at $4.67 billion (5 percent), which also saw the sharpest rise. Khyber Pakhtunkhwa, Baluchistan, and Pakistan-occupied Kashmir reported debts of $2.77 billion, $371 million, and $281 million, respectively. Federal authorities shoulder the lion’s share—84 percent—of external public debt, while provinces account for the remaining 16 percent.
Despite these daunting numbers, there are glimmers of hope. Pakistan’s economy grew by 2.5 percent in 2024, and the Economic Survey 2024–25 projects a modest uptick to 2.7 percent in 2025. Fiscal improvements include a current account surplus of $1.9 billion during July–April FY25 and remittances expected to reach $37–38 billion by year’s end. External reserves climbed to $16.64 billion by June 2025, a development that has bolstered investor confidence and prompted upgrades from global ratings agencies. The IMF’s recent staff-level agreement with Islamabad, which would unlock $1.2 billion under its Extended Fund Facility and Resilience and Sustainability Facility (pending board approval), aims to further stabilize macroeconomic conditions and support vital reforms.
Turning to Europe, France is wrestling with its own fiscal demons. On October 25, 2025, Bank of France Governor Francois Villeroy de Galhau issued a stark warning to lawmakers: the 2026 budget deficit must not exceed 4.8 percent of GDP if the country hopes to manage its ballooning debt and stay on track for a 3 percent deficit target by 2029. "It is absolutely necessary to get within 3% between now and 2029 and this means a maximum deficit of 4.8% next year to cover a quarter of the path," Villeroy told La Croix in a pointed interview, cautioning that anything more risks pushing France into "gradual suffocation."
The National Assembly is currently embroiled in a heated debate over the 2026 draft budget, which targets a 4.7 percent deficit. Prime Minister Sebastien Lecornu, whose government’s survival hinges on opposition cooperation, has signaled some flexibility: the real aim, he says, is to keep the deficit "within 5%" if that’s what it takes to avoid a political standoff. "It is no longer possible to govern by the discipline of one camp alone," Lecornu told lawmakers, "but by the cultivation of a rigorous debate between lawmakers who start with different beliefs."
Yet market confidence has been rattled. Moody’s Ratings recently downgraded France’s credit outlook from stable to negative, citing persistent political gridlock and legislative chaos. "The decision to change the outlook to negative reflects the increased risk that the fragmentation of the country’s political landscape will continue to impair the functioning of France’s legislative institutions," Moody’s said, as reported by Bloomberg. The agency warned that delays in reforms, such as President Emmanuel Macron’s suspended pension overhaul, could further erode growth and exacerbate long-term fiscal risks. Finance Minister Roland Lescure responded by reaffirming France’s commitment to "ambitious" deficit reduction, but admitted that the downgrade underscores the "absolute necessity" for a budget deal.
Investors have taken notice. The yield spread between 10-year French and German bonds—a key barometer of market risk—recently hit 89 basis points, nearly double the pre-election level, before settling at 81, the highest in 11 days. S&P’s unscheduled downgrade, which wiped out France’s average double-A rating across major agencies, triggered forced selling among investment funds with strict rating criteria, further amplifying volatility. The government’s draft budget aims to trim the deficit from 5.4 percent in 2025 to 4.7 percent in 2026, but with the Assembly floor still in flux, nothing is certain.
Meanwhile, in the Middle East, Iraq faces a debt dilemma of a different kind—one masked by the structure of its economy. On October 25, 2025, economic expert Manar Al-Obaidi warned that Iraq’s real internal debt-to-GDP ratio exceeds a staggering 120 percent when calculated against only the country’s productive sectors. Officially, the ratio stands at about 40 percent, but Al-Obaidi argues this figure is misleading because it fails to account for Iraq’s overwhelming dependence on oil revenues.
According to Al-Obaidi’s analysis, Iraq’s 2024 GDP was estimated at 211 trillion Iraqi Dinars. The oil sector alone accounted for approximately 52 percent of GDP, while the general government sector—funded almost entirely by oil—made up another 10 percent. The so-called productive sectors, including telecommunications, agriculture, industry, and finance, contributed just 35 percent (about 70 trillion Dinars) and are themselves indirectly reliant on oil. This lopsided composition means any dip in oil prices or exports can cause a swift contraction in GDP, exposing the economy to sudden shocks.
Al-Obaidi insists that a realistic assessment must compare debt to the actual, non-oil, non-government productive sectors. By this measure, the internal debt burden is more than 120 percent of productive GDP, placing Iraq in the danger zone for fiscal sustainability. "This separation is essential for financial truth," he stressed, arguing that Iraq must urgently grow its real productive sectors to reduce its vulnerability to global oil market swings.
Across these three nations, the message is clear: headline debt ratios often obscure deeper vulnerabilities. Whether it’s Pakistan’s struggle to match debt growth with economic expansion, France’s battle to restore political consensus and market trust, or Iraq’s urgent need to diversify beyond oil, the path to fiscal stability is fraught with tough choices and no easy answers. Policymakers everywhere are learning that transparency, reform, and a willingness to confront uncomfortable truths will be key to weathering the storms ahead.
