Pakistan’s debt is growing at a much faster rate than its income — widening the financing gaps which will require further borrowing to bridge them.
Pakistan’s external debt has nearly doubled whereas domestic debt has increased by six times in nominal terms over the last 12 years from 2011 to 2023, reveals a new report by Islamabad-based think tank, Tabadlab, on Pakistan’s Debt Crisis entitled “A Raging Fire”.
It says that the country’s total external debt now stands at USD 125 billion whereas domestic debt is at USD 147 billion — a total of over USD 270 billion or 92 per cent of its GDP. Public debt stands at USD 220 billion, a debt-to-GDP ratio of 74 per cent which is not particularly high when compared with other developing countries such as India (82 per cent), Brazil (88 per cent), Egypt (93 per cent), Kenya (70 per cent) and Myanmar (58 per cent).
However, the report expresses concern over both Pakistan’s debt profile and its borrowing and spending habits, terming it “unsustainable”. Excluding bilateral and IMF loans, Pakistan needs to pay back an estimated USD 49.5 billion in debt maturities by June this year of which 30 per cent is just the interest obligation. On the other hand, the country has reportedly been using its debt accumulation to fuel consumption and imports without substantial investments in its productive sectors or industry.
The reason for the rapid growth of Pakistan’s debt is attributed to the shortening of the boom (economic growth) and bust (recession) cycles. Each boom corresponds to a consumption-led burst of growth, immediately followed by a shortage of US dollars which supports that consumption. This leads to more debt which results in a period of bust. As the government borrows more US dollar liquidity from multilaterals or friendly countries such as China, it triggers another boom which drives consumption (imports) without a concomitant rise in exports or remittances, which shortens the boom and leads to another bust and inflation. The cycle keeps repeating, Tabadlab says in its report.
In per-capita terms, Pakistan’s debt has grown from USD 823 to USD 1,122 per person between 2011 and 2023, a rise of 36 per cent. In the same period, per-capita GDP has declined from USD 1,295 to USD 1,223, a fall of 6 per cent. This means that the country’s debt is growing at a much faster rate than its income — widening the financing gaps which will require further borrowing to bridge them.
Loss in government’s autonomy
The high level of external debt and the looming interest servicing and repayment obligations (30 per cent of currency inflows) imply a state of high vulnerability of the Pakistani economy to external shocks and macroeconomic volatility which can lead to financial market instability and currency devaluation. Pakistan’s heavy reliance on external lenders and programmes (22 IMF programmes presently and an anticipated 23rd programme) further make it prone to a debt trap. All this will inevitably lead to reputational damage to the country which is known to severely restrict a country’s ability to borrow money in the future. Furthermore, the growing need for climate financing puts additional strain on Pakistan’s borrowing needs.
On the other hand, the high domestic interest servicing (64 per cent of tax revenue) implies a loss in the Pakistani government’s autonomy over policy and decision-making as it may be forced to acquiesce with IMF conditions. Furthermore, it will crunch government spending on social services and climate financing as debt servicing will gain priority further deteriorating the nation’s education and health system and climate vulnerability profile.
Increasing demands of a growing population require more spending on social protection, health, education, and climate change related disasters, adaption strategies and green transition. In the wake of the nation’s huge interest servicing requirements, this will likely lead to widespread political and social upheavals in Pakistan, the likes of which we have seen in the form of political, constitutional and institutional crisis from February 2022 onwards.
