Domestic debt is the portion of a government's debt that is owed to creditors resident in the same country, typically denominated in the national currency. It is raised by selling Treasury bills and bonds to local banks, pension funds, insurers and households, through savings products sold to the public, and in some countries by borrowing from the central bank.
Its counterpart is external debt, owed to non-residents such as foreign governments, the International Monetary Fund, multilateral banks and foreign bondholders. The split matters because the two carry different risks: domestic debt exposes a government to local interest rates and the health of its banks, while external debt exposes it to the exchange rate and foreign lenders.
Domestic debt in plain terms
Think of a household that borrows partly from relatives in the same town and partly from a lender in another country. Money owed to relatives stays within the family circle: repaying it moves money from one pocket in the town to another. Money owed abroad has to be earned in the lender's currency and sent out of town.
A government's domestic debt is like the loan from relatives. It is mostly in the country's own money, which the government can raise through taxes or, in extreme cases, the central bank can create. That makes it easier to manage than foreign debt, but the relatives, here the country's banks and savers, can only lend so much before other borrowers are squeezed out.
How domestic debt is defined
International statistical manuals, including the IMF's public sector debt guide, separate domestic from external debt by the residence of the creditor, not by currency. A dollar bond bought by a local bank therefore counts as domestic debt, while a local-currency bond bought by a foreign fund counts as external. Some governments also publish a currency-based split, so readers should check which definition a table uses.
Domestic debt is usually broken down by maturity and by instrument:
- Short-term debt. Bills and other borrowing repayable within a year, often called floating debt.
- Long-term marketable debt. Bonds, notes and sukuk that can be traded in the capital market.
- Non-marketable debt. Savings certificates, post office savings and similar products that are sold directly to the public and cannot be traded.
Benefits and costs of domestic borrowing
A government that can borrow in its own currency from its own residents avoids the currency mismatch that has triggered many crises, a risk discussed under foreign currency debt and sovereign default. A deep domestic bond market also gives the central bank a tool for open market operations and gives the economy a benchmark yield curve.
The costs show up elsewhere. When banks put a large share of their deposits into government paper, less is left for private loans, an effect known as crowding out. High domestic debt also makes the government's interest bill sensitive to the policy rate, so monetary policy tightening can quickly widen the budget deficit. If the central bank is made to finance the government directly, a practice called monetary financing, the result can be inflation.
Pakistan's three categories of domestic debt
In Pakistan, the State Bank of Pakistan (SBP) and the Ministry of Finance classify central government domestic debt into three main categories:
- Permanent debt. Long-term marketable debt, mainly Pakistan Investment Bonds (PIBs) and Government of Pakistan Ijara sukuk, plus prize bonds.
- Floating debt. Short-term borrowing, almost entirely Market Treasury Bills (MTBs).
- Unfunded debt. Money raised through National Savings Schemes and a few smaller items such as Postal Life Insurance.
SBP's central government debt table also lists domestic foreign currency loans and Naya Pakistan Certificates held by residents as separate lines. According to the provisional figures for end-August 2026, central government domestic debt stood at about Rs 58.8 trillion, made up of roughly Rs 44.7 trillion of permanent debt, Rs 10.6 trillion of floating debt and Rs 3.4 trillion of unfunded debt. That was a little over 70% of total central government debt, the rest being external debt of about Rs 24.2 trillion.
Since the State Bank of Pakistan (Amendment) Act, 2022, Section 9C of the SBP Act bars the central bank from giving direct credit to the government, so new domestic borrowing must come from the market, mainly through the banks. Commercial banks are the largest holders of PIBs and MTBs, which ties the health of the banking system closely to the government's finances. The Ministry of Finance sets the borrowing plan, and the SBP runs the auctions as the government's agent, within the wider framework of government borrowing and debt management.