Dr. Ikramul Haq & Abdul Rauf Shakoori
Debt is a critical element in economic growth, allowing governments to finance infrastructure projects, social programmes, and economic stimulus measures that drive long-term development. Countries often borrow from multilateral institutions like the international Monetary Fund (IMF) and World Bank, Asian Development Bank, and Islamic Development Bank etc. or enter into bilateral agreements with foreign nations to bridge trade and fiscal deficits, support capital investments, and respond to unforeseen crises.
However, responsible debt management is essential to prevent economic instability and fiscal melt down. Therefore, effectively maintaining debt within a sustainable limit, usually set as a percentage of GDP, ensures that borrowing remains manageable relative to a country’s economic growth. If public debt exceeds sustainable thresholds, especially capacity of timely paybacks, it can lead to increased inflation, currency depreciation, higher debt servicing costs, and lowered investor confidence, ultimately restricting economic growth and social spending.
In Pakistan’s case, section 3 of the Fiscal Responsibility and Debt Limitation Act, 2005 (FRDL 2005) sets a public debt ceiling of 60% of GDP, reinforcing prudent fiscal management. Pakistan can borrow under specific conditions, including financing fiscal deficits [section 3(3)], funding development projects [section 3(4)], addressing emergencies [section 3(5)], refinancing existing debt [section 3(6)], and managing short-term liquidity needs section [3(7)]. If debt exceeds the prescribed threshold, section 6 of FRDL 2005 mandates parliamentary oversight and a fiscal recovery plan to restore debt sustainability.
Pakistan’s public debt has exceeded sustainable levels, breaching the thresholds established by FRDL 2005. The Debt Policy Statement 2025 reveals that public debt stood at 67.5% of GDP at the end of the last fiscal year [FY 2024], far above the legally mandated limit of 56.75%. The ceiling is set to be further tightened to 56% in the current fiscal year [FY 2025], making compliance increasingly difficult.
The debt burden has been exacerbated by rising interest payments, which reached a staggering Rs. 8.2 trillion in FY 2024, 43% higher than the previous year [FY 2023] due to a high-interest rate environment where the policy rate by the State Bank of Pakistan peaked at historic high of 22%.
Despite the federal primary surplus, the overall fiscal deficit has been widening, necessitating increased borrowing. The total public debt increased by 13% in the FY 2024 to reach Rs. 71.2 trillion, with domestic debt at Rs. 47.2 trillion and external debt at Rs. 24.1 trillion. Whereas the share of external debt in total public debt decreased to 34% by June 2024 due to limited borrowing options arising from Pakistan’s poor credit ratings, reliance on domestic borrowing has grown, increasing the risk of crowding out private sector investment.
The reliance on short-term debt instruments remains a critical concern, with the average time to maturity of domestic debt standing at just 2.88 years, posing significant refinancing risks.
Pakistan’s external debt reached US$ 133.4 billion as of September 30, 2024, growing by 3% from the previous year. The government has increasingly relied on multilateral and bilateral sources for funding, with significant disbursements from the World Bank (US$ 2.2 billion), IMF (US$ 1.2 billion), and Asian Development Bank (US$ 1.3 billion). The bilateral assistance also played a key role, with US$ 2.8 billion in inflows, including deposits from Saudi Arabia and China.
The repayment obligations remain significantly high, with Pakistan repaying US$ 4.98 billion in commercial bank loans and bilateral loans during the FY 2024.
The country also met its US$ one billion Eurobond repayment in April 2024, but external debt servicing remains a critical challenge, with upcoming debt maturities exceeding US$ 7 billion in 2025. The risk of default remains a looming threat if Pakistan fails to secure additional financing or restructure its repayment schedules.
The domestic debt situation has also deteriorated, with a heavy reliance on short-term borrowing through Market Treasury Bills (MTBs), which increased to Rs. 10.39 trillion. The stock of Pakistan Investment Bonds (PIBs) rose from Rs. 22 trillion to Rs. 28 trillion, increasing the share of permanent debt to 70% of total domestic debt.
However, the short average maturity period of these instruments indicates that the country remains vulnerable to liquidity pressures, particularly as commercial banks dictate lending terms in an environment of high policy rates.
The reliance on costly domestic debt has also led to higher debt servicing costs [Rs. 5.145 trillion from July-Decembre 2024 against annual allocation of Rs. 9.775 trillion], crowding out fiscal space for essential public services and infrastructure investments.
A major driver of Pakistan’s debt trap is the ballooning debt servicing costs, which have significantly constrained fiscal space for development spending. In the FY 2024, the budget makers allocated Rs. 7.303 trillion for debt servicing, making it the single largest expenditure item (the actual expense was Rs. 8.159 trillion). The share of interest payments in total revenue crossed 60%, meaning that more than half of all government revenue was used to meet debt obligations. This has limited resources for critical sectors such as health, education, and infrastructure.
The increasing debt burden has also led to inflationary pressures, eroding purchasing power and worsening the cost-of-living crisis for ordinary citizens. The Pakistani rupee has remained under pressure, and while some stability was achieved, persistent borrowing requirements and external vulnerabilities continue to weigh on exchange rate stability. The depreciation of the currency has made external debt repayments more expensive, further exacerbating fiscal stress.
Pakistan’s borrowing strategy includes exploring alternative funding mechanisms such as Green Sukuk, sustainability-linked bonds, and Panda Bonds. However, challenges remain in accessing international capital markets due to credit rating downgrades and concerns over debt sustainability. Pakistan has been unable to float new sovereign bonds, limiting its ability to raise funds through traditional sources.
The government has also considered debt-for-nature and debt-for-climate swaps, but the feasibility and impact of these initiatives remain uncertain. Furthermore, reliance on foreign commercial loans has decreased, as lenders demand higher interest rates and stricter conditions, further narrowing the government’s options for external financing.
The impact of Pakistan’s growing debt on the common citizen is severe. It raised inflation, fueled by higher borrowing and debt servicing costs, and has led to increased prices of essential goods and services. The reduction in development spending means fewer infrastructure projects, weaker public services, and limited job creation opportunities.
The reliance on short-term domestic borrowing has also driven up interest rates, making credit expensive for businesses and individuals, and further slowing economic growth.
The energy sector, heavily reliant on foreign financing, has seen delays in key projects due to funding constraints, worsening power shortages, and industrial productivity.
Pakistan’s deteriorating debt situation emphasizes the urgent need for fiscal reforms. The government must implement strict fiscal discipline, broaden the tax base, and cut non-development expenditures to curb excessive borrowing. The improvement of export-led growth is essential for improving foreign exchange reserves and reducing external vulnerabilities. Additionally, governance reforms and transparency in debt management are essential to restore investor confidence and ensure sustainable economic growth.
We must realize that without decisive policy actions, Pakistan risks falling deeper into a debt trap, compromising its economic sovereignty and placing an overwhelming burden on future generations. The root causes of excessive borrowing, such as weak revenue collection and inefficient public spending need to be addressed on the priority basis.
The government’s ability to address this crisis will depend on its commitment to structural economic reforms, improved fiscal discipline, and a shift towards long-term financial sustainability. The failure to address these challenges effectively could lead to an even greater reliance on external assistance, further diminishing Pakistan’s economic independence and stability.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, and cyber laws, ML/CFT, IT, intellectual property, arbitration, and international taxation. He studied journalism, English literature, and law. He holds an LLD in tax law with a specialization in transfer pricing.
He was a full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner.
He is the Chief Editor of Taxation. He is the country editor and correspondent of the International Bureau of Fiscal Documentation (IBFD) and a member of the International Fiscal Association (IFA). He is a Visiting Faculty at the Lahore University of Management Sciences (LUMS) and member Advisory Board and a Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE).
He has co-authored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (Revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law, Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is the author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, and its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines, and newspapers at home and abroad.
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime, and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies, and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, and cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career, he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and has also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study-driven scenarios and exams to ensure knowledge transfer.
His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan Rauf’s Research on Labour Laws and Income Tax, and others.
His articles include Revenue Collection: Contemporary Targets vs. Orthodox Approach, It is Time to say goodbye to Our Past, US Double Standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly listed Pakistan, Corruption is No Excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF Secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge,.
The recent publication, coauthored with Huzaima Bukhari, is
Pakistan Tackling FATF: Challenges & Solutions
available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35