ISLAMABAD: Pakistan will continue making trillions of rupees in interest payments on existing public debt beyond December 2027, despite a constitutional requirement to eliminate interest-based finance by January 1, 2028, according to the government’s transition strategy.

Official sources said the government plans to gradually shift new borrowing to Shariah-compliant financial instruments after December 2027. However, loans obtained before that date will continue to be repaid under their original contractual terms, including interest obligations.

Interest Payments to Continue

Interest payments account for nearly half of the federal budget, with domestic debt servicing remaining one of the government’s largest expenditures.

For the 2026–27 fiscal year, the federal government has allocated more than Rs8 trillion for interest payments alone.

According to official sources, over 70 percent of the total interest payments are made to domestic banks.

Existing Debt to Remain Under Original Terms

The government’s strategy provides that all conventional public debt outstanding as of December 31, 2027, will remain in force until its maturity.

Only after the maturity of those loans will they be replaced with Shariah-compliant financing instruments. Until then, the government will continue to meet its obligations under the original agreements.

Officials said the government has limited control over the terms of external debt, while domestic banks will continue receiving interest on existing loans even after completing their transition to Islamic banking.

Constitutional Amendment

The policy follows the 26th Constitutional Amendment, approved in October 2024, which amended Article 38(f) of the Constitution to require the elimination of interest-based finance from Pakistan’s financial system by January 1, 2028, with the objective of establishing a fully Shariah-compliant economic framework.

Potential Legal Questions

While the government maintains that it is legally bound to honor its contractual commitments, official sources acknowledged that the continuation of interest payments on existing domestic debt after January 2028 could become the subject of judicial interpretation, given the constitutional amendment.

Under the government’s roadmap, commercial banks are expected to complete their transition to Islamic banking by the end of 2027.

However, the Ministry of Finance’s policy also provides protection for contractual rights and obligations arising from interest-based transactions entered into before the constitutional deadline.

Officials said that although future government borrowing is planned to rely on interest-free, Shariah-compliant financial instruments, the policy does not apply retroactively to existing debt, which will continue to be serviced until maturity before being refinanced through Islamic financial mechanisms.