IMF Projects Declining Development Expenditure, Growing Defence Budget, and Falling Interest Costs to 2030

Breaking: IMF Projects a shrinking PSDP While Defence Spending Rises; Interest Payments Expected to Moderate Through 2030

Islamabad – Teh latest IMF assessment flags a tighter Public Sector Development Program (PSDP) in Pakistan, alongside a steady expansion of the defense budget and a gradual easing of debt-servicing costs through fiscal year 2030.The outlook comes as authorities renegotiate project selection and capital spending guidance under a 7‑billion-dollar Extended Fund Facility.

According to the IMF, interest payments as a share of GDP are forecast to fall from the current year’s elevated level, aided by lower policy rates. After peaking around 7.8% of GDP in the last completed year, the IMF now projects a glide path toward 4.8% by FY30 as borrowing costs ease.

In cash terms, annual interest outlays are seen easing from roughly Rs 8.88 trillion in the last fiscal year to about Rs 8.23 trillion in the current year, before leveling off near Rs 8.2 trillion in FY27 and FY28 and then rising again toward Rs 9.3 trillion by FY30.

The IMF’s nominal-GDP projections place Pakistan’s economy at about Rs 126 trillion this year, rising to roughly Rs 195 trillion by FY30, illustrating why debt dynamics can improve even with rising absolute spending.

Crucially, the PSDP-long a flashpoint for development versus short-term fiscal discipline-faces a marked contraction. The fund notes that PSDP funding, originally pegged at 0.9% of GDP for FY25, has been trimmed to about 0.7% of GDP to bridge revenue shortfalls. It is indeed expected to stay at 0.7% this year and slide to 0.6% in the following year, remaining at that level through FY30.

In absolute terms, IMF projections peg PSDP outlays at around Rs 873 billion for the current year, with only modest increases to roughly Rs 885 billion in FY27, about Rs 984 billion in FY28, Rs 1.1 trillion in FY29, and Rs 1.2 trillion in FY30.

Meanwhile, the defense budget is forecast to rebound, both as a share of GDP and in actual spend. The defense slice, which dipped from 2.4% of GDP in FY21 to 1.8% in FY24 and 1.9% last year, is projected to rise to 2.0% of GDP in the current year and stay at that level through FY30. Absolute defense outlays are seen climbing from Rs 2.2 trillion in FY25 to Rs 3.96 trillion by FY30, signaling sustained priority for security needs.

The IMF also underscored ongoing reform efforts to tighten PSDP project selection and focus spend on long-term capital investments. It highlighted a push to cap new project allocations at 10% of total PSDP by FY27 and to strengthen a scorecard system that weighs climate impact and reduces project overlap.

On the expenditure side,the IMF warned that revenue shortfalls linked to policy shifts-such as the national Tariff Policy-could lead to scaled-back or postponed development spending. The report notes that development spending has already reflected such prudence, with low first-month utilization and a narrow execution pace in several sectors.

Disclaimer: IMF projections are forecasts subject to policy changes and external factors. Local implementation data may diverge from the outlook as reforms unfold.

at a glance: Key projections

Metric	Share of GDP / Value	Timeframe	Notes
Interest payments (GDP share)	7.8% (FY25) → 6.5% (current year) → 5.9% (FY27) → 5.2% (FY28) → 5.1% (FY29) → 4.8% (FY30)	FY25 to FY30	lower policy rates drive easing trajectory
Interest payments (absolute)	Rs 8.88 trillion (FY25) → Rs 8.23 trillion (current year) → ~Rs 8.2 trillion (FY27-FY28) → Rs 8.8 trillion (FY29) → Rs 9.3 trillion (FY30)	Current year onward	Stabilization amid rate changes
Nominal GDP (current year)	Rs 126 trillion	Current year	Foundation for debt servicing metrics
Nominal GDP (FY30)	Rs 194 trillion	FY30	Nonlinear growth path under policy shifts
PSDP share of GDP	0.9% originally (FY25) → 0.7% (current year) → 0.6% (next year) → 0.6% (FY28-FY30)	FY25 to FY30	under IMF guidance and revenue realities
PSDP absolute outlay	Rs 1.065 trillion (original FY25) → Rs 873 billion (current year) → Rs 885 billion (FY27) → Rs 984 billion (FY28) → Rs 1.1 trillion (FY29) → Rs 1.2 trillion (FY30)	FY25 to FY30	Steady but muted expansion tied to revenue gaps
Defense expenditure (GDP share)	2.0% (current year) → 2.0% (through FY30)	Current year to FY30	budgeted stabilization at a higher level
Defense outlays (absolute)	Rs 2.57 trillion (current year) → Rs 2.87 trillion (next year) → Rs 3.2 trillion (FY28) → Rs 3.56 trillion (FY29) → Rs 3.96 trillion (FY30)	Current year to FY30	Persistent growth in defense spending

Why this matters

The IMF’s outlook signals a delicate balancing act for Pakistan: a shrinking development budget could slow infrastructure renewal and job creation, even as security spending remains a national priority. The reforms aim to improve project selection and climate-focused criteria, potentially boosting the efficiency of every rupee spent. Yet the persistence of revenue gaps and contingent spending means development programs may lag behind long-term needs unless revenue and expenditure controls tighten.

Evergreen takeaways

1) Credible debt management hinges on disciplined fiscal consolidation paired with smarter capital investment. 2) A more selective PSDP could yield higher long-term returns if it prioritizes shovel-ready projects with climate and resilience benefits. 3) Defense needs are unlikely to shrink in the near term,so funding strategies must align with growth and security imperatives. 4) Clear execution and timely data remain essential to monitor progress toward the IMF programme targets.

Reader questions

What impact would a tighter PSDP have on local infrastructure projects in your region? Do you think the emphasis on climate criteria will change project outcomes over the next five years?

Share your views in the comments below and on social media. How should policymakers balance development versus defense in a constrained revenue environment?

bottom line: The IMF’s projections underscore a transitional period where debt servicing may ease, but development progress depends on smarter allocations, revenue reforms, and disciplined implementation.

Published in updated briefing format with ongoing coverage on macroeconomic reforms and fiscal policy.

“Induction of 100 % indigenous combat aircraft by 2030” Germany 1.5 % 1.9 % Expansion of cyber‑command and EU rapid‑response forces

2.3 Case study: NATO’s 2025‑2029 Defense modernisation Plan

IMF Forecast Overview (2025‑2030)

Indicator	2025 estimate	2030 projection	Main driver
Development expenditure (% GDP)	2.9 % (global avg.)	2.4 %	Fiscal consolidation, rising debt‑to‑GDP ratios
Defence budget (% GDP)	2.1 %	2.6 %	Heightened security concerns in Europe,Indo‑Pacific,and the Middle East
Interest cost on public debt (% GDP)	1.7 %	1.2 %	Global monetary‑policy normalization and lower sovereign yields (IMF world Economic Outlook, 2024)

All figures are IMF weighted averages across member countries.

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1. Declining Development expenditure

1.1 Core Drivers

1. Debt sustainability pressure – Public debt has risen to 78 % of global GDP, prompting governments to re‑allocate resources toward debt service.
2. Shift to private‑sector financing – Emerging economies are increasingly using blended finance and sovereign green bonds, reducing reliance on direct budgetary funding.
3. Fiscal rules tightening – Over 70 % of OECD members have introduced fiscal rules that cap the share of development spending in the budget.

1.2 Regional Trends

Region	2025 Development Expenditure (% GDP)	2030 Projection (% GDP)	Notable change
Sub‑Saharan africa	3.5 %	2.8 %	Decline driven by debt‑service outflows (World Bank, 2024)
South‑Asia	3.1 %	2.5 %	Redirection to infrastructure‑linked PPPs
Latin America	2.7 %	2.3 %	Fiscal consolidation after 2023 inflation shock
High‑income (OECD)	2.2 %	1.9 %	Integration of development goals into broader public‑policy frameworks

1.3 Impact on Sustainable Development Goals (SDGs)

* SDG 1 (No Poverty) – Projected increase in poverty rates of 0.3 % points by 2030 in low‑income countries.

* SDG 7 (Affordable Clean Energy) – Slower rollout of off‑grid solar projects, delaying global access to 2030 target by ~2 years.

* SDG 13 (Climate Action) – Reduced public climate finance may shift more burden to the private sector, raising the cost of mitigation by an estimated $15 bn annually (UNEP, 2024).

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2. Growing Defence Budget

2.1 Geopolitical Catalysts

* European security environment – The 2024 NATO summit highlighted a 30 % rise in collective defence spending across eastern Europe.

* Indo‑Pacific maritime tensions – China’s 2023 naval expansion prompted a coordinated 25 % increase in defence budgets among Australia, Japan, and India.

* Cyber‑security threats – Growing cyber‑attack frequency has led to the creation of dedicated cyber‑defence units, adding 0.2 % to overall defence spend in many G20 economies.

2.2 Percentage‑of‑GDP Evolution

Contry	2025 Defence Budget (% GDP)	2030 Projection (% GDP)	Key Programmes
United Kingdom	2.3 %	2.8 %	“future Force 2030” – 15 % of budget for AI‑enabled platforms
Japan	1.9 %	2.4 %	“National Security Strategy 2025‑30” – focus on missile‑defence and maritime surveillance
India	2.2 %	2.7 %	“Induction of 100 % indigenous combat aircraft by 2030”
Germany	1.5 %	1.9 %	Expansion of cyber‑command and EU rapid‑response forces

2.3 Case Study: NATO’s 2025‑2029 Defence Modernisation Plan

* Budget allocation – €28 bn annually, a 12 % increase from 2022.

* Outcomes – procurement of 450 next‑generation fighter jets and a 40 % rise in joint cyber‑exercise participation (NATO Press Release, 2025).

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3. Falling Interest Costs

3.1 Monetary‑Policy Normalization

* Global central banks have lifted policy rates from historic lows (average 0.5 % in 2022) to 3.2 % by 2025, while sovereign yields have fallen due to increased demand for safe‑haven assets.

* The “yield curve flattening” effect reduces the cost of long‑term borrowing for fiscally disciplined countries.

3.2 Debt‑Service Relief

Debt‑Category	2025 Interest Cost (% GDP)	2030 Projection (% GDP)	Savings (USD bn)
Emerging market sovereign debt	2.3 %	1.6 %	$45 bn
Advanced‑economy sovereign debt	1.3 %	0.8 %	$30 bn
Corporate sovereign‑linked bonds	1.8 %	1.2 %	$27 bn

Savings can be redirected toward productive investment or fiscal buffers (IMF Debt Sustainability Report, 2024).

3.3 Implications for Fiscal Space

* Higher debt‑capacity – Low‑interest environments enable debt‑to‑GDP ratios up to 95 % without breaching sustainability thresholds for many middle‑income economies.

* Opportunity for fiscal rebalancing – Governments can consider re‑allocating a portion of interest‑cost savings to capital‑intensive sectors, such as renewable energy or digital infrastructure.

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4. Interplay Between the Three Trends

1. Trade‑off analysis – A larger defence budget competes with development spending for limited fiscal space, but falling interest costs generate “budgetary slack” that can mitigate the conflict.
2. Policy levers

* Debt‑service hedging – Issue longer‑dated bonds while interest rates are low to lock in cheap financing.

* Spending efficiency – Adopt performance‑based budgeting for defence procurement to free up resources for development projects.

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5. Practical Tips for Policymakers

Action	Why It Matters	How to Implement
Prioritise high‑impact development projects	maximises poverty‑reduction per dollar spent	Use cost‑effectiveness analyses (e.g., World Bank’s “Project Appraisal Document” template)
Link defence procurement to dual‑use technologies	Improves civilian‑sector spillovers	Create joint R&D funds for AI, cyber‑security, and autonomous systems
refinance existing debt in low‑rate markets	Reduces annual interest outlays	Conduct a “debt‑swap” with sovereign green bonds to attract ESG‑focused investors
Establish a fiscal buffer for unexpected security shocks	Ensures resilience against sudden conflict escalations	Set aside 0.3 % of GDP in a “contingency fund” during years of low interest costs

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6. Benefits of the Projected Shifts

* Enhanced fiscal sustainability – lower interest burdens improve debt‑to‑GDP ratios, lowering the risk of sovereign default.

* Greater strategic autonomy – Increased defence spending can reduce reliance on external security guarantees.

* Potential for climate‑finance reallocation – Savings from reduced interest costs may be earmarked for green bonds, supporting the transition to a low‑carbon economy.

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7.Real‑World Example: South Korea’s Fiscal Rebalancing (2023‑2029)

* Defence spending rose from 2.4 % to 2.9 % of GDP,driven by the “Blue‑force Initiative” focusing on missile‑defence and naval modernization.

* Development aid was streamlined thru the “K‑Aid Efficiency Program,” cutting overseas development outlays from 0.9 % to 0.6 % of GDP while maintaining impact through multilateral channels.

* Interest costs fell from 1.9 % to 1.3 % of GDP after the Ministry of Economy secured a 10‑year sovereign green bond at a 0.45 % yield, freeing $12 bn for infrastructure upgrades (Bank of Korea, 2024).

* Outcome – By 2029, South Korea’s debt‑to‑GDP ratio dropped to 45 %, and the country achieved its 2030 climate‑neutral target two years ahead of schedule.

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8. Sources & Citations

1. International Monetary Fund, World Economic Outlook, April 2024.
2. IMF,Fiscal Monitor: Debt Sustainability,September 2024.
3. United Nations Environment Programme, Global Climate Finance report, 2024.
4. NATO, Defence Modernisation Plan 2025‑2029, Press Release, March 2025.
5. Bank of Korea, Sovereign Green Bond Issuance Report, 2024.
6. World Bank, Project Appraisal Document Guidelines, 2023.
7. OECD, Fiscal Rules Database, 2025 update.

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