Pakistan’s external debt has almost doubled in the last ten years, increasing from $68.7 billion in 2015 to $135.1 billion in 2025. The total public and publicly guaranteed debt constitutes $107.1 billion of the figure, private external debt is $17.6 billion and the short term debt is $10.45 billion.
While the increase in Pakistan’s external debt should not have been very surprising, what is more alarming about it is the rapid rate at which it has increased. Most of the borrowing has actually been made to fulfill financing gaps externally, build foreign exchange reserves and repay old debts. This money is not being utilized to invest in projects which would yield future income, exports and production capacities of the country.
There are structural problems inherent in Pakistan’s economy behind the mounting problem of debt. We are not generating enough income to pay off our debts comfortably. Debt service is one of the major problems confronting the nation’s budgetary allocation and has been a heavy drain on funds which should have been utilized for infrastructural development, education, health, science and technology. It has left little room for stimulating economic activity. There is an unhealthy cycle created by this phenomenon. Much of the budgetary allocation goes into repaying loans and interests. Projects that require development financing become difficult to implement. Weak economic growth means low tax and foreign exchange earnings, and in order to finance its expenditures, the government borrows more money.
The practice of successive governments has been to borrow money in order to address budget deficits, external payment requirements, and domestic consumption needs. The area of development spending is one of the first ones to be reduced in times of increased financial strain. This might offer some immediate help but does little to improve the capacity of the economy to earn money. The case of Pakistan, which has an average rate of growth of about 2.7 percent, shows how difficult it is to grow economically in such circumstances.
Borrowing in itself is not a problem. Countries in the process of developing require foreign investment in order to develop the necessary infrastructure, energy sector, industries, technology, etc., that would accelerate their economic growth. There is usually not enough money available domestically for such purposes. The problem of borrowing begins when loans do not help to raise the level of productivity or exports.
Borrowing to create power installations, develop industries, enhance the transport system or increase the productive capacity of agriculture would be beneficial in the long run. However, borrowing for the purpose of meeting ongoing expenditures, covering up chronic budget deficits or repaying past debts, but without tackling their causes, only creates additional liabilities in the future. Unfortunately, our government has not been able to keep up the difference. The recurring balance of payments crises in Pakistan show how lack of a productive and exporting economy makes borrowing a perpetual feature of our economic planning. Instead of creating more foreign exchange capacity, we have to rely on our international creditors and friendly nations to cover our current obligations.
Narrowness in the economy, poor export performance, lack of investment and continuous budget deficits are some of the factors that continue to weaken the economic standing of the nation. Poor export performance is still inadequate enough to satisfy the increasing demand for imports, debt repayment, and other foreign payments. At the same time, domestic savings and investments are not enough to finance the growth of the economy.
Helping Pakistan escape from defaulting has been the remittances, aid money and loans rolled over by friendly nations. Also, programs with the International Monetary Fund have enabled the nation to get some financing and help gain back the trust of lenders abroad. But these measures will not compensate for economic reform in Pakistan. They can just ease up some pressure; but they won’t automatically build industries, increase productivity, exports and jobs.
The government must not be limited to its capability to borrow money again or extend the repayment period. Instead, the more critical issue would be whether the country will have sufficient growth, revenues, and foreign exchange for meeting its commitments without affecting development and welfare expenditures. Failure to develop such a capability would leave the country open to outside influences and to changes in global finance.
It is imperative at this point to develop a viable policy of debt management that takes into consideration not only the financial issues of today but the economic objectives for the future as well. In the short run, the government has to improve the handling of its current debts, minimize unnecessary and costly borrowings, and make sure that when the country borrows, it can afford it in the economic sense. In the longer run, the investment should be made in the areas which have the potential of contributing to growth in the production capacity and also help enhance the external account balances. Agriculture, industries, information technology, energy, and exports should be emphasized. The public sector investments should be made in areas which result in higher production and reduced costs of production.
All of these have to be complemented by structural reforms in other areas as well. The tax base should be widened to avoid the risk of having only the salaried class and the registered businesses bear the burden of taxes. The public sector spending should become productive whereas there should be reduced inefficiencies in the state-owned organizations and misdirected subsidies. Cost cutting for businesses, regulatory reforms and availability of finance should all be considered at the same time.
In particular, exports require dependable sources of energy at relatively cheap rates, clear policies from the government, new technology and efficient transportation systems. If not, it will be hard for the country to stand the competition in international markets. Any investment in terms of foreign investments or cheaper loans cannot help the country out of economic troubles if the business sector faces such challenges as expensive energy sources. Such economic stagnation comes with a variety of adverse effects that go beyond the books of accounts and statistics of debt owed by the government. Such a low rate of growth leads to lack of jobs, poverty and underinvestment in health facilities and other key sectors such as education and basic amenities. Undernourishment during childhood days, lack of safe drinking water and poor public infrastructure are some of social costs associated with over-indebtedness.
The fact that Pakistan has been accumulating increasing amounts of foreign debt is more than just a fiscal challenge; it is a consequence of the country’s inability to develop an economically viable and sustainable strategy. It is true that foreign debt can help finance development initiatives, but foreign debt cannot substitute productive capability, exports, investment, and economic planning. Unless the government alters its focus and harnesses the nation’s potentials through available means, debt will keep limiting economic freedom and hindering development.