Pakistan’s economy is addicted to debt. Lavish government spending, recklessly financed through borrowing has resulted in a precarious debt trap, a depreciated rupee, escalating inflation, and an economy on the brink.
The comfortable narrative of easing inflation obscures a far more dangerous reality. Like an individual who indulges in extravagant spending using multiple credit cards, confident that future income will cover the mounting debts, Pakistan continues unchecked borrowing. Month after month, the borrowing continues.
And when the bills arrive, only the minimum amount due is paid, with the nation congratulating itself for staying afloat while the interest charges balloon in the background. This isn’t just a cautionary tale; it’s a chillingly accurate reflection of Pakistan’s fiscal trajectory over the past decade.
Successive administrations have perpetuated this cycle, amassing substantial debt at the expense of economic stability.
The PML-N government (2013-2018) borrowed PKR 10.66 trillion, primarily for infrastructure projects that failed to generate commensurate economic growth. The PTI administration (2018-2022) escalated borrowing by an additional PKR 14.92 trillion, predominantly through domestic channels, inflating the money supply and stoking inflation.
The PDM and caretaker governments (2022-present) have added PKR 13.64 trillion in just two years, an unprecedented rate of accumulation, pushing Pakistan’s total debt beyond PKR 74.6 trillion (USD 254 billion) by the end of June 2024. This relentless borrowing, devoid of substantial economic reforms, has precipitated one of the most severe inflationary periods in the nation’s history. It’s like taking out a payday loan to cover a credit card bill—a temporary fix with devastating long-term consequences.
The government’s strategy of maintaining high interest rates to stabilise the rupee against the dollar, while simultaneously relying on domestic borrowing to finance fiscal expenditures, has created a perfect storm.
Interest payments are skyrocketing, fueling inflation. As of September 2024, domestic debt constituted 66.2 percent of Pakistan’s total public debt, with approximately 74 percent of this debt linked to floating interest rates. This structure exposes the economy to significant interest rate risks, as rising rates escalate debt servicing costs.
In the first nine months of FY2024, interest expenses on domestic debt reached Rs 4,807 billion, a 55 percent increase from the same period the previous year. According to the State Bank of Pakistan (SBP), this surge in interest payments, driven by high borrowing costs and the resetting of existing floating-rate debt at elevated rates, has intensified inflationary pressures, adversely affecting economic stability and the purchasing power of taxpayers.
Every “minimum payment” we make as a nation is costing us dearly in the long run. A significant portion of the national budget is now dedicated to debt servicing, crowding out essential investments in education, healthcare, and infrastructure.
Moreover, bilateral and multilateral debt forms a substantial segment of Pakistan’s external obligations.
As of September 2024, the country’s total external debt stood at $133.455 billion, with bilateral and multilateral creditors accounting for a significant portion.
Notably, debt owed to China amounted to approximately $68.91 billion, making it Pakistan’s largest bilateral creditor. In the fiscal year 2025, Pakistan faces over $22 billion in external debt repayments, including nearly $13 billion in bilateral deposits.
While there are expectations that bilateral partners will roll over these deposits, the sheer magnitude of these obligations underscores the precariousness of Pakistan’s financial position. This dependence on bilateral loans carries strategic and economic implications, influencing foreign policy and economic planning and limiting Pakistan’s economic sovereignty.
The government’s recent assertions of easing inflation offer superficial comfort. The Consumer Price Index (CPI) reportedly declined to 2.4 percent in January 2025, compared to 4.1 percent in December 2024 and 28.3 percent in January 2024.
However, this narrative overlooks the persistent high costs of essential goods, which remain unaffordable for many citizens. The reported decline in inflation is a mirage, masking the painful reality faced by ordinary citizens.
Core inflation remains high, with urban core inflation at 7.8 percent YoY and rural core inflation at 10.4 percent YoY. Specific price increases in non-food sectors further reveal the misleading nature of CPI-based claims.
For example, Motor Vehicle Tax surged by 168.79 percent YoY, footwear prices rose by 31.88 percent, dental services increased by 26.16 percent, and medical tests became 15.16 percent more expensive (Source: Pakistan Bureau of Statistics, January 2025 CPI Report).
Meanwhile, gas charges increased by 10.04 percent YoY, and house rent rose by 4.94 percent YoY. While electricity charges dropped by 15.6 percent YoY, this reduction is largely due to short-term subsidies and adjustments rather than sustained structural price relief. While inflation appears controlled on the surface, the reality for households struggling with high costs tells a different story.
A more insidious threat looms: deflation. Economic historian Niall Ferguson has cautioned that excessive public debt, coupled with deflation, exacerbates the real burden of repayments. With 74 percent of Pakistan’s domestic debt linked to floating interest rates, a decline in rates may offer temporary relief.
However, should deflation ensue, the real value of debt escalates, intensifying the fiscal strain. The debt-to-GDP ratio, projected to reach 71 percent in 2025, further compounds this vulnerability, potentially unraveling the facade of stability and complicating future repayments.
Without structural reforms, Pakistan risks deepening its debt trap, where repayment pressures could trigger a cycle of economic stagnation and financial instability. Pakistan’s predicament parallels historical economic crises. Japan in the 1990s grappled with prolonged deflation following years of excessive borrowing, leading to economic stagnation.
Argentina’s recurrent IMF interventions faltered due to inflation control measures unaccompanied by structural reforms, culminating in sovereign defaults.
Greece in the 2010s endured a debt crisis that necessitated severe austerity, plunging the nation into a prolonged slump. Despite these cautionary tales, Pakistan’s policymakers remain preoccupied with short-term metrics, neglecting deeper structural issues. History offers free lessons, but we seem determined to learn the hard way.
Time is of the essence. Reliance on IMF loans, currency stabilisation, and superficial inflation control is insufficient for sustainable economic health. Pakistan must embark on substantive reforms to escape this vicious cycle. This entails transitioning from debt-fueled growth to strategies emphasizing foreign direct investment (FDI) in export-oriented sectors that create jobs and transfer technology, export-driven manufacturing, and stringent fiscal discipline.
Encouragingly, FDI has surged by 20 percent in the first half of fiscal year 2025, reflecting renewed investor confidence.
Additionally, initiatives like the Roshan Digital Account have attracted over USD 9 billion in inflows, while remittances are expected to reach a record USD 35 billion during this fiscal year, bolstering the external account.
However, these inflows are not sufficient on their own to solve the debt crisis, as remittances are often used for consumption rather than investment. These are glimmers of hope, but they require a complete overhaul of our economic strategy to truly take root.
The government must also restructure its debt portfolio, favoring long-term, fixed-rate borrowing to mitigate interest rate volatility. This could involve seeking debt relief from creditors or issuing longer-term bonds with fixed interest rates.
The State Bank of Pakistan has proactively reduced the key policy rate by 100 basis points to 12% as of January 27, 2025, marking the sixth consecutive cut since June 2024, aiming to rejuvenate economic sentiment amid declining inflation. However, without addressing the underlying structural deficiencies, such monetary measures offer only a temporary respite — a temporary painkiller for a chronic illness.
While some argue that infrastructure spending, even if debt-financed, provides long-term economic benefits, Pakistan’s experience has been marred by corruption, inefficient project management, and a lack of transparency. As a result, these projects have failed to generate the expected returns, leaving the country with a mountain of debt and little to show for it.
For too long, Pakistan’s economic policies have mirrored an individual maxing out credit cards and then desperately juggling balance transfers to avoid facing the music.
Yet, if deflation takes hold, the opposite occurs—the real debt burden intensifies, rendering repayment increasingly untenable.
History demonstrates that economic collapses ensue when governments overextend borrowing without clear repayment strategies. Pakistan now stands at a crossroads: embrace the arduous path of necessary reforms or persist in unsustainable borrowing, risking prolonged stagnation. The peril extends beyond inflation; the true menace is a collapsing fiscal framework.
Immediate, decisive action is imperative. The choice is stark: a painful but necessary transformation, or a slow slide into economic oblivion.
The time for half-measures is over; Pakistan must choose a future of sustainable prosperity over the illusion of short-term gains.
Copyright Business Recorder, 2025
The writer is an economist and an educationist based in Lahore, Pakistan
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