Pakistan's real vulnerability lies in what it borrows for, what its economy produces and how its state is governed Huzaima Bukhari & Dr. Ikramul Haq Why can one country carry substantial sovereign debt without surrendering economic autonomy, while another repeatedly requires external rescue? The conventional answer begins with the debt-to-GDP ratio. It should not end there. Sovereign debt is neither inherently destructive nor evidence of economic failure. Modern states borrow to build railways, ports, power systems, universities, water networks and other assets whose benefits extend across generations. The relevant questions are different: who borrowed, in what currency, at what cost and maturity, and for what purpose? Most importantly, did the borrowing enlarge the economy's future capacity to repay? Pakistan's predicament becomes clearer when viewed through this comparative political economy lens. India's first World Bank loan, in 1949, financed railways. Subsequent assistance supported power, steel and infrastructure. China also used international development finance extensively while retaining strong control over its development strategy. External finance supplemented domestic transformation; it did not become a permanent substitute for it. Pakistan has also borrowed for productive infrastructure. It would be incorrect to suggest otherwise. The deeper problem is that recurrent external financing has increasingly become necessary to stabilise public finances and balance of payments. Borrowing is repeatedly needed not simply to build tomorrow's productive capacity but to manage yesterday's liabilities and today's fiscal constraints. That distinction separates development finance from dependency finance. Comparisons based solely on debt-to-GDP ratios obscure this distinction. A sovereign does not service debt with GDP. It services debt through revenues, exports, foreign exchange and refinancing capacity. Two countries with the same debt-to-GDP ratio can therefore face radically different risks. A productive economy with a large revenue base, deep domestic capital markets, high savings, diversified exports, credible institutions and substantial human capital can sustain debt that would destabilise a poorer state. Debt denominated largely in domestic currency is also fundamentally different from foreign-currency obligations that require dollars or other reserve currencies for repayment. Pakistan demonstrates the problem. The International Monetary Fund (IMF) presently assesses public debt as sustainable under its baseline. It simultaneously describes medium-term risks as high because Pakistan faces large gross financing requirements and difficulties securing external financing. That apparent contradiction is revealing. Sustainability does not mean fiscal comfort. Pakistan's vulnerability lies in the relationship between debt and the productive capacity supporting it. Its tax base remains narrow. Exports remain inadequate for the size of its population. Human development is poor. Investment and productivity have remained weak. The World Bank describes Pakistan's recent history as one of "volatile low growth and low investment" that has caused it to fall behind comparable economies. IMF's own projections underline the constraint. General government revenue and grants are projected at around 15.8 percent of GDP in FY2026, while government debt remains around 67.5 percent. The Fund expects only modest real growth. The central issue is consequently not whether Pakistan's debt ratio is the world's highest. It plainly is not. The question is how much debt a low-revenue, low-productivity economy can carry without sacrificing development. The late economist Dr. Pervez Tahir coined an evocative expression for Pakistan's fiscal establishment: revenuecracy. It describes more than the Federal Board of Revenue (FBR). It captures a system preoccupied with collecting the annual target rather than constructing an equitable fiscal contract. Salaried employees are visible. Registered businesses are visible. Importers pass through customs. Electricity consumers receive bills. Banks can deduct tax at source. Petroleum provides an easily taxable consumption stream. The state therefore taxes what it can reach. Political economy explains why this persists. Powerful interests defend exemptions, concessions and preferential treatment. Governments requiring immediate cash cannot wait for institutional transformation. They increase withholding, advance and indirect taxation instead. Revenuecracy then meets debtocracy. A state unable to mobilise sufficient equitable revenue borrows. Debt servicing compresses fiscal space. Lower fiscal space increases pressure for additional revenue. Governments return to those already documented because they are easiest to tax. Investment suffers. Growth remains weak. External financing gaps reappear. Another IMF programme follows. This is not a conspiracy imposed entirely from abroad. Pakistan negotiates IMF programmes as a sovereign member. Many Fund demands-taxing undertaxed sectors, improving energy-sector finances, controlling losses of state-owned enterprises and strengthening public financial management-address genuine domestic failures. IMF itself acknowledges, however, that recent fiscal consolidation has relied primarily upon increased revenues from the formal sector and urges greater taxation of undertaxed sectors. The political economy of adjustment therefore matters as much as its arithmetic. Pakistan has spent decades announcing reform of taxation, administration, energy, public enterprises and governance. International lenders have financed numerous programmes intended to assist that process. The persistence of the same structural problems raises an uncomfortable question: what permanent institutional asset has this borrowing created? Loans financing a railway, dam or transmission network leave something identifiable behind. Loans supporting institutional reform must be judged differently, but they too require measurable outcomes: improved tax capacity, faster justice, better administration, stronger regulation or reduced cost of government. Borrowing that repeatedly leaves the underlying institution substantially unchanged merely transfers the cost of failed reform into future budgets. This is where sovereignty becomes material rather than rhetorical. A country dependent upon refinancing cannot exercise the same range of economic choices as one capable of financing itself. No territory need be occupied. No foreign official needs to collect taxes. Dependence itself creates leverage. The government now proposes transforming Pakistan into a US$1 trillion economy by 2035. Planning Minister Ahsan Iqbal has correctly acknowledged that this requires fundamental transformation rather than continuation of the status quo. That proposition should be tested economically rather than celebrated or dismissed politically. A trillion-dollar economy cannot be produced by administrative declarations. It requires sustained productivity growth, rising investment, much larger exports, reliable energy, competitive cities, functioning local governments, affordable productive finance and massive accumulation of human capital. Above all, it requires a state capable of implementing policy. Pakistan cannot become a modern productive economy while running twenty-first-century economic sectors through an administrative structure whose incentives remain hierarchical, generalist and excessively centralised. Specialist institutions require autonomy and professional leadership. Provinces must perform their constitutional responsibilities. Local governments must control meaningful functions and revenues. Taxation must move from extraction towards a fiscal contract between citizens and the state. Borrowing must undergo the same transformation. Long-term external finance should predominantly create long-term productive capacity: water, energy, transport, digital infrastructure, education, health, climate resilience and affordable finance for agriculture and enterprise. Future generations can reasonably service debt that leaves them more productive assets. They should not inherit liabilities accumulated merely because the present generation refused to reform the state. The World Bank's own Pakistan@100 framework envisages 2047 through accumulation of physical and human capital, productive allocation of resources, sustainability and better governance. That is ultimately the relevant horizon. Pakistan does not need freedom from debt. No serious modern economy does. It needs freedom from dependence on debt for survival. The difference between the two is the difference between borrowing to finance transformation and borrowing because transformation never occurred. The writers are lawyers, adjunct faculty at Lahore University of�Management Sciences and members of the�Advisory Board of�Pakistan Institute of Development Economics
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