Growing concerns over Pakistan’s rising external debt and inefficiencies in development spending have prompted calls for greater fiscal discipline and tighter oversight of foreign-funded projects.
The Senate Standing Committee on Economic Affairs recently cautioned the Economic Affairs Division (EAD) that inflated project costs, over-invoicing, weak planning and implementation delays were draining billions of rupees from the national treasury. It advised the division to exercise restraint in contracting new external loans and to address structural weaknesses in project management.
The warning reflects mounting anxiety among policymakers over Pakistan’s reliance on external financing to sustain development spending and manage fiscal pressures. While foreign loans have long played a critical role in funding infrastructure projects and supporting economic reforms, critics argue that inefficiencies in project execution often undermine their intended benefits, leaving the country with higher debt obligations but limited economic returns.
Members of the Senate committee noted that poor project planning and inadequate monitoring frequently lead to inflated costs. Over-invoicing and procurement irregularities further add to the financial burden, making projects far more expensive than originally estimated. Such inefficiencies, they argued, ultimately place a heavy strain on public finances at a time when the government is already struggling with limited fiscal space.
Delays in project implementation are another persistent challenge. Development projects in Pakistan often face prolonged timelines due to bureaucratic bottlenecks, weak coordination between federal and provincial authorities, and difficulties in releasing counterpart funds required to complement foreign assistance. As projects stall, costs escalate due to rising construction expenses, currency depreciation and contractual adjustments.
Pakistan’s narrow fiscal space has further complicated the situation. With the government grappling with high debt servicing costs and limited revenue collection, allocating adequate funds for development projects has become increasingly difficult. The shortage of counterpart funding frequently slows project execution, particularly those financed through external assistance, which require timely local contributions to ensure smooth implementation.
Recognising these constraints, the International Monetary Fund (IMF) has in recent years pushed Pakistan to adopt stricter spending priorities. Under the country’s last three IMF programmes — beginning in 2019 and including the ongoing arrangement — the government has been urged to focus development spending on projects nearing completion rather than initiating new ones. The objective is to maximise economic returns from existing investments and avoid the accumulation of incomplete or delayed projects.
This approach has resulted in a significant gap between the government’s budgeted development spending and the actual disbursement of funds. While the Public Sector Development Programme (PSDP) continues to allocate large amounts for development initiatives on paper, only a relatively small proportion is ultimately released during the fiscal year. Consequently, several foreign-funded projects have faced funding constraints, reducing their scope and delaying completion.
However, the concerns raised by the Senate committee extend beyond project-specific loans to broader programme and budget support financing. Pakistan has increasingly relied on such external assistance to bridge gaps in its balance of payments and to support fiscal stability.
Recent economic indicators highlight the challenges facing the country’s external sector. Pakistan’s trade deficit has widened again, largely reflecting the recurring boom-and-bust cycle that has historically characterised the economy. Economists attribute this pattern to inconsistent fiscal and monetary policies that periodically stimulate economic growth but also trigger surges in imports and external imbalances.
During the July–January period of fiscal year 2025-26, Pakistan’s exports declined by 5.5 percent compared with the same period a year earlier, while imports rose by 9.8 percent. This divergence further widened the trade deficit, increasing pressure on the country’s external accounts.
Despite a noticeable rise in workers’ remittances during the same period — which have traditionally served as a financial cushion for the economy — the current account balance deteriorated. Instead of maintaining a surplus of $564 million as recorded in the comparable period the previous year, the current account moved into deficit, reaching negative $1.074 billion.
Energy imports remain one of the largest contributors to Pakistan’s trade imbalance. Petroleum and petroleum products account for a significant share of the country’s total import bill, making the economy highly vulnerable to fluctuations in international oil prices.
This vulnerability has become more pronounced in light of recent geopolitical tensions in the Middle East. Global oil markets reacted sharply after the outbreak of hostilities in the region, with international oil prices reportedly rising by around 10 percent within just two days.
The situation has been further complicated by disruptions in shipping routes. Some traders have reportedly halted oil shipments through the strategically vital Strait of Hormuz after the Islamic Revolutionary Guard Corps (IRGC) issued radio warnings declaring the strait closed. Although some maritime traffic continues to flow through the passage, the uncertainty surrounding shipping routes has heightened concerns about potential supply disruptions.
Given Pakistan’s heavy dependence on imported energy, any prolonged instability in oil markets could significantly increase the country’s import bill and widen its trade deficit further. Higher fuel costs would also have a ripple effect across the domestic economy, pushing up transportation costs, increasing inflationary pressures and straining public finances.
Despite concerns, reducing reliance on external borrowing in the near term appears difficult. The current federal budget has already projected external financing requirements of nearly $20 billion for the fiscal year. This figure reflects the country’s continued dependence on foreign loans to finance its fiscal deficit and maintain adequate foreign exchange reserves.
Pakistan’s reserves themselves are largely supported by external borrowing and financial assistance. In addition to multilateral loans, the country receives approximately $12 billion annually in rollover support from three friendly countries. While these rollovers help stabilise the balance of payments in the short term, they also underscore the structural challenges facing the economy.
Ultimately, reducing Pakistan’s reliance on external borrowing will require broader fiscal reforms and stronger economic management. Policymakers may need to pursue stricter budgetary discipline, improve revenue collection and curb unnecessary expenditures. In particular, controlling current expenditure — including administrative and operational spending — could create greater fiscal space for development priorities.
It is becoming increasingly clear that long-term economic stability will depend on prudent fiscal management, more efficient use of development funds and a gradual shift away from heavy dependence on foreign loans. Without such reforms, Pakistan risks remaining trapped in a cycle of borrowing to finance deficits, leaving the economy vulnerable to both domestic inefficiencies and external shocks.