Till debt do us part

In Hamlet, Shakespeare’s character Polonius offers timeless advice to his son, Laertes, "Neither a borrower nor a lender be”, warning of the perils of debt and dependency. For Pakistan, this wisdom rings painfully true, as the nation grapples with a debt crisis that has become a generational burden.

The IMF review, though seemingly smooth and mostly primary-surplus-focused, masks deeper structural fissures, particularly in the country’s liability-laden balance sheet. The numbers tell a grim story: a child born in Pakistan today inherits a staggering debt of approximately Rs290,000 -- a stark contrast to the Rs50,000 owed by a child born in 2010.

This represents a 480 per cent increase in per capita debt over the years, far outpacing the 350 per cent growth in GDP per capita during the same period, underscoring the myopic policies of successive governments -- thanks to repeated bailouts by MLDAs, mismanagement, and a rent-seeking economy -- that have marred the economic prospects of future generations.

The data reveals a troubling trajectory. From 2009-10 to 2023-24, Pakistan’s central government debt surged from Rs8,442 billion to Rs68,914 billion, a CAGR of 16 per cent, with an average annual increase of 21 per cent from 2019 to 2023. By January 2025, the debt has further escalated to Rs72.1 trillion, reflecting a 4.65 per cent increase in seven months.

The debt-to-GDP ratio, which stood at 51 per cent in 2009-10, peaked at 74 per cent in 2019-20 and remains alarmingly high at 65 per cent in 2023-24. Despite the Fiscal Responsibility and Debt Limitation Act (FRDLA) mandating a debt-to-GDP limit of 60 per cent, Pakistan has consistently breached this threshold. The FRDLA further requires a reduction of 0.50 per cent annually from 2018-19 till 2023-24 and 0.75 per cent thereafter, but the country has blatantly disregarded these targets as well. Thus, setting an audacious outlook for its own checks and balances.

Pakistan’s debt reveals significant trends in its growth and composition. From June 2024 to January 2025, central government domestic debt increased by 6.5 per cent, from Rs47,160 billion to Rs50,243 billion, driven primarily by long-term instruments such as Pakistan Investment Bonds (PIBs), which grew by 13 per cent. Short-term debt, however, saw an 18 per cent decline, reflecting efforts to manage liquidity pressures. External debt remained relatively stable, with a marginal 1.0 per cent increase, but its share in total debt decreased from 32 per cent to 30 per cent due to the faster growth of domestic debt.

Vertically speaking, the dominance of domestic debt in Pakistan’s debt portfolio is haunting. As of January 2025, domestic debt accounted for 70 per cent of total debt, with long-term instruments making up 58 per cent of the total. External debt, while significant, constituted only 30 per cent of the total debt. Within domestic debt, federal government bonds alone represented 52 per cent of the total debt, underscoring the government’s reliance on market-based borrowing. Short-term debt, including Market Treasury Bills, accounted for 12 per cent of total debt, despite the decline, reflecting the ongoing liquidity challenges.

As a result, the burden of debt servicing has reached alarming levels. Interest payments as a percentage of tax revenue have skyrocketed over the years, consuming a significant portion of the national budget. In 2023, interest payments accounted for 73 per cent of tax revenue, 301 per cent of development expenditure, and 35 per cent of total expenditure. By 2024, these ratios have worsened, with interest payments consuming 81 per cent of tax revenue, 403 per cent of development expenditure, and 40 per cent of total expenditure.

This has left little room for development expenditure, which has a pro-growth and anti-boom-bust cyclical economic effect, stagnating at around 10 per cent of total expenditure and further hindering economic growth and social development. And to top it off, the government’s revenue mobilisation efforts have been woefully inadequate, as evident from the Rs606 billion shortfall in collections during the first eight months of the fiscal year. This failure is characterised by a regressive tax system that disproportionately burdens the already taxed while failing to tap into the informal economy.

The causes of this debt crisis are multifaceted. Persistent fiscal and current account deficits, coupled with large amortisation and interest payments, have forced the country into a self-perpetuating cycle of borrowing. Non-debt-creating inflows, such as foreign investment and privatisation proceeds, have dwindled, while massive currency devaluations and high policy rates have fueled inflation and stifled economic growth.

SOEs, particularly the power sector, have become a significant drain on resources, with exorbitant tariffs crippling industrial competitiveness. For instance, Pakistan’s energy-intensive industries pay nearly double the electricity costs of their counterparts in China, India and the US, further eroding export potential.

To break free from this debt trap, Pakistan must adopt a multi-pronged strategy. First, the investment climate must be derisked to attract foreign direct investment (FDI) and stimulate economic growth. This requires political stability, policy consistency and robust legal frameworks to protect investors. Second, the twin deficits -- fiscal and current account -- must be addressed through fiscal discipline and export diversification. Reducing reliance on imports and boosting export-oriented industries can help narrow the trade gap and generate foreign exchange.

Third, non-debt foreign currency inflows, such as remittances, must be prioritised. The government should also explore innovative financing mechanisms, such as green bonds and climate finance, to fund sustainable development projects. Fourth, the financial haemorrhage of SOEs, particularly in the power sector, must be stemmed. Reforms aimed at reducing inefficiencies, curbing losses and rationalising tariffs are essential to alleviate the burden on the economy.

Finally, revenue mobilisation must be overhauled. A broad-based tax reform, focusing on broadening the tax net and ensuring equitable liability, is crucial. The informal economy, which accounts for a significant portion of economic activity, must be brought into the tax fold through targeted measures and incentives. By addressing these structural issues, Pakistan can chart a path toward sustainable economic growth and free future generations from the shackles of inherited debt.

The writer is a Peshawar-based researcher who works in the financial sector.