According to the data released by the State Bank of Pakistan, the country’s external debt servicing rose to $4.2 billion in the second quarter of FY25, marking a significant increase from $3.6 billion in the preceding quarter. The bulk of these repayments stemmed from public debt, which surged to $3.29 billion in Q2-FY25, compared to $2.98 billion in Q1-FY25. Our domestic debt and liabilities also went up, reaching Rs50.19 trillion in December 2024, reflecting a 16.17% increase from Rs 43.21 trillion in December 2023.

An important fact to remember in this regard is that the largest portion of this debt was permanent debt, which grew 22.58% year-on-year to Rs 37.86 trillion. This included Rs 36.99 trillion in federal government bonds, Rs 474.94 billion in SBP’s on-lending against SDR allocations, Rs 394.32 billion in prize bonds, and Rs 2.84 billion in market loans. Floating debt also increased, rising 3.9% to Rs 8.7 trillion, with Market Treasury Bills making up Rs8.6 trillion of this total.

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 eats up 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,  the overall trend remains deeply concerning. A high debt-to-GDP ratio increases the likelihood of default. The level of debt relative to the size of the economy becomes a crucial factor in assessing the country’s ability to meet its debt obligations.

The stark fact is that Pakistan has been pushed into a debt trap. New loans are acquired to pay the old ones. The foreign debt burden has increased to above $ 130 billion with debt-to-GDP ratio touching around 90%. Around 50% of the government’s revenues are being devoured by interest payments on debts. The entire economy is running on loans. Pakistan’s public debt has never come down since 1991. Since 2011 per capita debt has increased by 36% from $ 823 to $ 1122 in 2024. Urgent need is to stop reckless borrowing and establish a Debt Audit Commission to investigate the reasons and legality of the mounting debt.”

To start with, Pakistan became highly indebted in the 1970s, when the government borrowed to cope with the impact of high oil prices. Ever since, the country has suffered from a large external debt. The response to this debt crisis has been to continuously obtain bailout loans from the International Monetary Fund (IMF). For 32 of the last 44 years, Pakistan has received loans from the IMF, one of the most sustained periods of lending to any country. However, Pakistan today continues to have a large external debt, inequality is rising, and the country has failed to meet most of the Millennium Development Goals.

Between 1990 and 2016, external government debt payments averaged 16% of government revenue, more than public spending on health care. However, despite being impoverished and heavily indebted, the country was excluded from the IMF and World Bank HIPC debt relief scheme for arbitrary reasons. The bailout loans have resulted in the debt being passed down generations, giving the IMF an enormous power over Pakistan’s development, through the economic conditions the Fund has imposed on the country. Lending and grants have also been a means to prop up various military governments in Pakistan supported by the western world. This has included the regimes of General Musharraf (2000-2008) and Zia-ul-Haq (1978-1988). Assistance, especially from the US and the Western world, has been in return for military government general support during the Cold War, Pakistan support for Afghan fighters against Soviet occupation, and during the ‘war on terror’.

Through the 1980s and 1990s Pakistan increased VAT at the behest of the IMF, whilst reducing taxes on imports. As a percentage of tax revenue, sales taxes in Pakistan increased from 7% in 1980 to almost 30% by 2000. Overall taxes increased by 7% for the poorest households, whilst falling by 15% for the richest. Pakistan’s debt burden increased again from 2008 because of the disastrous floods in 2010, and the impacts of the global financial crisis, such as the rise in the cost of imported oil. The government’s external debt reached $59 billion by 2016. In 2017, Pakistan has used-up 20% of its foreign currency reserves to try to defend the value of the rupee. If it does have to devalue, this will rapidly increase the size of external debt payments, but it also cannot keep using up the currency reserves.

How to get out of the debt trap? Relying exclusively on external debts has failed to rescue Pakistan from its economic and financial challenges. The nation must strive to establish a robust and sustainable economic governance ecosystem. Critical structural and institutional reforms necessary to revitalise key economic sectors, improve tax collection and enhance governance, have been ignored over the years. The consequences of this neglect are evident, including an alarming rise in both domestic and external debt, which poses a serious threat to the economic stability and growth. The need is for major  political parties to prioritize the development of an economic charter that focuses on sustainable economic systems to alleviate fiscal deficits, empower the local business ecosystem, and break the cycle of the debt trap. Failing to address the current debt trap could result in public discontent, leading to support for populist or extremist political parties. Such a situation could also lead to increasing polarization, division, and frustration among the citizens, especially the youth.