akistan’s economy is facing a severe and multifaceted crisis due to fiscal instability, a fragile currency and an unsustainable 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. Successive governments have preferred short-term borrowing over long-term planning for export-led growth and indulged in mindless spending, leading to dreadful debt, IMF bailouts and a steady erosion of investors’ confidence.

Despite the urgency, critical structural and institutional reforms necessary to revitalise key economic sectors, improve tax collection and enhance governance, have been largely ignored. The consequences of this neglect are evident. These include an alarming rise in both domestic and external debt, posing a serious threat to the economic stability and public finances.

As of November 2024, the government’s domestic debt stood at Rs 48,895 billion, a 17.7 percent increase compared to November 2023. The government accumulated an additional Rs 7,356 billion in domestic debt in just one year. As a result of such reckless borrowing, debt servicing now consume nearly 75 percent of the federal revenues.

In the fiscal year 2023-24, the government allocated Rs 7.5 trillion (actual expense was Rs 8.2 trillion) for debt servicing, leaving little for development and social services. Compared to November 2022, the domestic debt has increased by Rs 15,243 billion or 47 percent. The trajectory is clearly unsustainable. While the pace of borrowing over the last 12 months (November 2023 to November 2024) has been slightly slower (at 17.7 percent compared to the previous year’s 23.4 percent) the overall trend remains deeply concerning.

A 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 increased from Rs 7,543 billion in November 2023 to Rs 9,551 billion in November 2024. This highlighted a persistent cash flow shortage to manage expenditures. The overreliance on short-term debt instruments is raising the cost of borrowing and exposing the economy to greater refinancing risks.

As of September 30, the external debt was $133.4 billion, reflecting a 3 percent rise from September 2023. Over the past two years, external debt has risen by 5 percent. This seemingly moderate growth masks the underlying issue of a failure to generate sufficient foreign exchange to meet debt obligations.

The external debt-to-GDP ratio currently stands at 34.5percent, slightly better than recent years but still alarming due to slow economic growth. The government’s total debt rose to $79.3 billion from $78.1 billion in June 2024.

Borrowing from International Monetary Fund rose to $9.2 billion in September 2024, indicating an increased dependence on the lender of last resort to stabilisze the economy. The foreign exchange liabilities rose to $12.04 billion, further straining foreign the reserves. The strategy of securing rollovers from China, Saudi Arabia and the UAE has helped delay the threat of default, but long-term sustainability remains a serious concern.

Foreign economic assistance between July and November 2024 was largely in the form of loans, not grants. Multilateral disbursements included $1.65 billion from the Asian Development Bank, $1.52 billion from the International Development Association and $240.7 million from the Islamic Development Bank. Bilateral loans included $122.2 million from China, $66.3 million from France and $76 million from Saudi Arabia. Additionally, Pakistan incurred $3.77 billion foreign commercial loans.

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. 

Disbursements against budget estimates of foreign economic assistance in the first five months of 2024-25 amounted to over $19.39 billion, reflecting a 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 FY 2024-25, the government has allocated over Rs 9.775 trillion for debt servicing, significantly reducing funds available for social services, infrastructure and economic growth initiatives.

Domestic debt servicing has risen sharply, with over Rs 3.2 trillion allocated in the first half of FY 2024-25. The external debt servicing required $4.8 billion in repayments within the same period. The upcoming debt maturities in 2025, including repayments of over $7 billion in Eurobonds and multilateral loans, pose a major financial challenge.

Exchange rate depreciation is another critical concern as it raises the cost of imports, further fueling inflation and reducing the purchasing power of ordinary citizens. High inflation rates in the past have already impacted the purchasing power of the public, significantly eroded real wages. Essential commodities such as wheat, sugar and fuel have witnessed price hikes of over 40 percent in the past year alone, further burdening low-income groups.

The investor confidence is 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). FDI inflows dwindled to $170 million in 2024, compared to $252 million in 2023, a decline of 32 percent.

The total forex reserves stood at $12,673 million on December 31, 2023. The amount rose to $16,052.10 million by January 31, 2025, but remained short of the mounting requirements. Strict austerity measures proposed by the IMF have limited public sector spending and growth. Energy and infrastructure development 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 percent of Pakistanis are registered as taxpayers. A broadening of the tax base through digitisation and reducing exemptions could generate significant additional revenue. Simultaneously, non-essential expenditure must be reduced drastically. This should include untargeted subsidies in the energy sector.

Reforming or privatising loss-making state-owned enterprise is another essential step. Entities such as PIA, Steel Mills are a permanent drain on public resources.

On the external front, we need to negotiate grace periods with creditors to manage debt maturities and pivot towards climate financing and diaspora bonds to reduce reliance on high-interest loans. Reviving economic growth requires diversifying exports and induce investment. Incentivising key export sectors such as textiles, IT and agriculture can narrow the trade deficit. Trade agreements with the EU and GCC nations should be prioritized. Tax holidays and reduced regulation could attract FDI.

Governance reforms, digitising public procurement, effective anti-corruption bodies, and modernising the judiciary for expeditious settlement of disputes can restore investor trust. Greater energy sector efficiency can be achieved through tariff rationalisation, reducing line losses and investing in solar power.

Finally, political stability is essential to ensure reforms that last beyond election cycles. We risk perpetual stagnation without these measures. Inactions and delays will only deepen the crisis, burdening the future generations with insurmountable debt and social unrest.

Dr Ikramul Haq, writer and an advocate of the Supreme Court, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.