Pakistan is caught in a double debt trap. This trap has two components – domestic and foreign. According to an estimate, domestic and foreign debt servicing consume almost the entire tax revenue, forcing the government to rely on borrowing for its administrative expenditure.

The latest reports show that domestic debt of the federal government increased by Rs537 billion in July. This is due to a revenue shortfall that started from the beginning of 2024-25. Further, the country’s total debt rose to Rs69.604tr at the end of July from Rs68.914tr in June, marking a rise of Rs690bn in a month.

During the period under review, a major surge was recorded in the domestic debt stock. The central government’s borrowings from domestic sources went up by 1.1 percent or Rs 537 billion to Rs 47.697 trillion in July 2024 up from Rs 47.160 trillion in June 2024. The government’s domestic borrowings were dominated by long-term loans worth Rs 36.941 trillion and Rs 10.638 trillion short-term borrowing.

The external debt in rupee terms rose by 0.7 percent or Rs 153 billion during the first month of this fiscal year. The total stocks of external debt rose to Rs 21.907 trillion at the end of July 2024 as against Rs 21.754 trillion in June 2024. The government has projected a borrowing estimate of Rs9.3 trillion for FY25 to bridge the revenue gaps to meet its current expenditure. The federal government is on a borrowing spree. It borrowed a record Rs8.4tr from the domestic banking system in FY24 for budgetary support to finance the fiscal deficit at an unprecedented interest rate of 22pc, which overburdened the economy. The debt servicing in FY24 reached Rs8.3tr, indicating a fast worsening economic crisis.

Last week, the State Bank of Pakistan released new data showing that the government’s domestic borrowing rose to Rs47.697tr at the end of July compared to Rs47.160tr in June, an increase of Rs537bn. However, domestic borrowing jumped from Rs39.016tr in July 2023 to Rs47.697tr, an increase of Rs8.681tr. This means that continued heavy borrowing in the last 12 months will force the government to borrow more for debt servicing in FY25.

The PML-N government is struggling to meet external debt repayment obligations to avoid a default-like situation but is heavily taxing the domestic stakeholders. This policy entails a drastic cut in the development budget each year, causing low economic growth and unemployment. The government’s debt servicing charges have been mounting because the State Bank of Pakistan kept the interest rate at a record 22pc in FY24. The aggressive government borrowing from the banking system is increasing debt servicing and squeezing fiscal space for the private sector, forcing them to reduce their business activities.

However, in the coming days the government’s debt servicing burden is going to lighten as the interest rate has been slashed by 2.5pc during the last couple of months, while another cut of 150bps is expected in the SBP’s Monetary Policy Committee meeting. The decline in the interest rate would reduce the costs as the government has been borrowing trillions of rupees from the banks. However, the Rs47.69tr domestic debt will still consume the entire tax revenue.

As we all know, the prime objective behind incurring sovereign debt is to tackle the current economic  crises and fund investments for growth and development. However, reliance on debt should be minimum and within the country’s paying capacity. When a nation fails to manage its debts effectively, it enters a state of debt distress, and this is what Pakistan is suffering from right now. In our case, the debt has  become a crisis and worsened the problems that necessitated the borrowing. As of 2023, the total debt and liabilities-to-GDP ratio stood at 89.9 per cent, accompanied by an annual deficit exceeding 6.9pc of GDP.

Our debt management strategy has been faulty because the government borrows heavily from international financial institutions as a result of which total external debt and liabilities are 42.1pc. This involves heavy dollar expenditures to repay the debts, putting pressure on forex reserves and necessitating further borrowing from international financial institutions.Simultaneously, the country owes substantial amounts to its own financial institutions, about 47pc of its GDP. Most of this debt comes from local banks, constituting more than 87pc of the money these banks lend to the government.

As a result, a significant portion of the budget — specifically, debt servicing payments amounting to Rs9.8 trillion, up from Rs7.3tr the previous year, nearly equal to government revenues —has been allocated for this purpose in fiscal year 2024-25.

What is the solution to the debt problem? The only viable way of the debt crisis is to stop taking further loans and find ways to develop our indigenous resources like raising revenue by taxing agriculture and large urban land holdings. Another way is to boost industrial production and exports to earn more dollars. Last but not the least, the government must drastically cut its own lavish expenditure and large scale subsidies to the elite classes.