Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy is facing a severe and multifaceted crisis due to fiscal instability, a fragile currency, and an unsustainable ever-rising debt burden. The root causes of this predicament lie in decades of reliance on debt-driven growth, lack of structural reforms, and persistent fiscal mismanagement. The successive governments have preferred short-term borrowing over long-term planning for export-led growth, indulged in mindless spending, leading to dreadful debt trap, repeated IMF bailouts, and a steady erosion of investors’ confidence.
What makes the situation more painful is the fact that despite the urgency of the situation, critical structural and institutional reforms necessary to revitalize key economic sectors, improve tax collection, and enhance governance, have been largely ignored. The consequences of this neglect are evident—alarming rise in both domestic and external debt, posing a serious threat to the economic stability and public finances.
The domestic debt situation is particularly concerning, as of November 2024, the government’s domestic debt soared to Rs. 48,895 billion, a 17.7% increase compared to November 2023. The government accumulated an additional Rs. 7,356 billion in domestic debt in just one year. This reckless borrowing has monstrously increased debt servicing, now consume nearly 75% of total federal revenues.
In the fiscal year (FY) 2023-24, the government allocated Rs. 7.5 trillion (actual expense was Rs. 8.2 trillion ) for debt servicing alone, leaving little for development and social services. When comparing the debt figures from November 2022, domestic debt has increased by Rs. 15,243 billion, or 47%, an unsustainable trajectory. While the pace of borrowing in the last 12 months (November 2023 to November 2024) has been slightly lower at 17.7% compared to the previous year’s 23.4%, the overall trend of borrowing remains deeply concerning.
The breakdown of domestic debt highlights some key components that underscore the structural flaws in Pakistan’s fiscal management. Permanent debt, which includes long-term instruments, rose from Rs. 29,944 billion in November 2023 to Rs. 35,646 billion in November 2024, a significant increase, floating debt, which consists of short-term borrowing instruments, peaked at Rs. 10,248 billion in June 2024 before slightly declining to Rs. 9,637 billion in November 2024.
Unfunded debt, which includes liabilities such as pensions and provident funds, fluctuated but remained high at Rs. 2,851 billion in November 2024. The reliance on short-term borrowing instruments such as Market Treasury Bills (MTBs) has increased from Rs. 7,543 billion in November 2023 to Rs. 9,551 billion in November 2024. It highlights the persistent cash flow shortages to manage expenditures effectively. This overreliance on short-term debt instruments is increases the cost of borrowing and exposing the economy to greater refinancing risks.
On the external front, Pakistan’s debt situation is equally precarious. As of September 30, 2024, the external debt reached US$ 133.4 billion, reflecting a 3% rise from September 2023. Over the past two years, external debt has risen by 5%. This seemingly moderate growth masks the underlying issue of failure to generate sufficient foreign exchange to meet debt obligations.
The external debt-to-GDP ratio currently stands at 34.5%, slightly better than previous years, is still alarming due to country’s slothful economic growth. The government’s total debt, key element of external liabilities, at US$ 79.3 billion—increased from US$ 78.1 billion in June 2024.
Borrowings from International Monetary Fund surged to US$ 9.2 billion in September 2024, indicating an increased dependence on lender of last resort to stabilize the economy. The foreign exchange liabilities also rose to US$ 12.04 billion, further straining foreign reserves. The strategy of securing rollovers from China, Saudi Arabia and UAE has helped delay immediate default risks, but long-term sustainability remains a serious concern.
The foreign economic assistance between July and November 2024 is largely as loans rather than grants. Similarly, multilateral disbursements included US$ 1.65 billion from the Asian Development Bank (ADB), US$ 1.52 billion from the International Development Association (IDA), and US$ 240.7 million from the Islamic Development Bank (IsDB). Bilateral loans included US$ 122.2 million from China, US$ 66.3 million from France, and US$ 76 million from Saudi Arabia. Additionally, Pakistan borrowed US$ 3.77 billion in foreign commercial loans, further straining its fiscal health.
The disbursements against budget estimates of foreign economic assistance in the first five months of FY 2024-25 amounted to over US$ 19.39 billion, reflecting the heavy reliance on external inflows. This excessive reliance on foreign creditors is not only raising external debt servicing obligations but also limiting our fiscal autonomy.
The consequences of Pakistan’s rising debt burden are serious and far-reaching. The most immediate impact is the increasing cost of debt servicing, which is diverting a substantial portion of government revenue away from development projects. In the FY 2024-25, the government allocated over Rs. 9.775 trillion for debt servicing alone, significantly reducing funds available for social services, infrastructure, and economic growth initiatives.
Domestic debt servicing has particularly risen sharply, with over Rs. 3.2 trillion allocated in just the first half of FY 2024-25. The external debt servicing requires US$ 4.8 billion in repayments within the same period, adding further pressure on foreign reserves. The upcoming debt maturities in 2025, including repayments of over US$ 7 billion in Eurobonds and multilateral loans, pose a major financial challenge.
The exchange rate depreciation is another critical concern. It increases the cost of imports, further fueling inflation and reducing the purchasing power of ordinary citizens. The past inflation rates have already impacted the purchasing power of the public and significantly eroded real wages and increasing the cost of living and essential commodities such as wheat, sugar, and fuel have witnessed price hikes of over 40% in the past year alone, further burdening lower-income groups.
The investor confidence is also at risk due to persistent fiscal mismanagement. The high debt levels create uncertainty in financial markets, leading to capital flight and reduced foreign direct investment (FDI). Pakistan’s FDI inflows have already dwindled to US$ 170 million in 2024, compared to US$ 252 million in 2023, a sharp decline of 32%.
Country’s total forex reserves stood at US$ 12,673 million by December 31, 2023, increased to US$16,052.10 million by January 31, 2025, still not aligning with mounting requirements. The IMF’s programmes, imposing strict austerity measures, have further limited public sector spending and growth. The energy and infrastructure have been particularly affected, with delays in critical development projects due to a lack of funding.
We need a comprehensive and sustainable fiscal strategy to broaden the tax base to address fiscal challenges. Currently, only around 2% of Pakistanis are registered as taxpayers. The broadening of base through digitization and reducing exemptions, and tax rates could generate significant revenue. Simultaneously, non-essential expenditure must be reduced drastically, particularly untargeted subsidies in the energy sector, costing billions annually.
Reforming or privatizing loss-making state-owned enterprise is another essential step. Entities such as PIA, Steel Mills and Railway drain public resources—their privatization could save billions in annual bailouts.
On the external front, we need to negotiate grace periods with creditors to manage debt maturities, and pivot toward climate financing and diaspora bonds to reduce reliance on high-interest loans. Reviving economic growth requires diversifying exports and induce investment. The strategic initiative would be to incentivize key export sectors such as textiles, IT, and agriculture, which could narrow the trade deficit. Trade agreements with the EU and GCC nations should be prioritized, while tax holidays and reduced regulations could revive FDI.
The governance reforms, digitizing public procurement, effective anti-corruption bodies, and modernizing the judiciary for expeditious settlement of disputes, would restore investor trust. Energy sector’s efficiency can be achieved through tariff rationalization, reducing line losses, and investing in solar. Finally, political stability is essential to ensure reforms beyond election cycles. We risk perpetual stagnation without these measures. The inactions and delays (continued inertia) will only deepen the crisis, burdening future generations with insurmountable debt and social unrest.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.