EDITORIAL: Global debt rose to USD 348 trillion by end December 2025, thereby challenging the Keynesian guidelines notably that rising public debt to fund public spending that fuels productivity (be it for the development of inadequate infrastructure – both physical and social) will have a positive multiplier effect on the economy (multiple of the actual spending). Economists argue that in the event that the average interest rate remains below the Gross Domestic Product (GDP) growth rate governments are able to sustain higher debt without triggering fiscal instability.
Fiscal instability has been dealt with by developed economies with positive investment grade ratings through relatively easy access to borrowing or, as was the case with Greece, access to European Union funds though conditions imposed were particularly harsh, including severely contractionary fiscal and monetary policies. The United States has relied on its ability to print dollars, the preferred currency for global trade and reserves, which explains why President Trump is so averse to the de-dollarisation by an ever-expanding BRICS (Brazil Russia India, China and South Africa) membership though he has yet to take account of the fact that the country’s frequent use of sanctions as a foreign policy tool may have been the major contributory factor.
More and more developed economies have begun to show an ever-rising percentage of debt to GDP prompting economists to look at the linkage between the interest payable on government debt and the economy’s growth rate. This has produced disturbing results with projections for 2025 showing Japan at 208 to 230 percent, Singapore 159 percent, Italy 132.5 percent, the United Kingdom 131.1 percent, France 116.5 percent, Canada 113.9 percent, and Euro area 84.9 percent.
The key question, therefore, is for individual countries to assess at which point their debt becomes harmful for their economy. Empirical data suggests that higher debt levels lead to lower economic growth, especially if the debt levels exceed a critical range, which of course varies from country to country. Studies further suggest the threshold of debt to GDP for advanced economies is at 75 to 80 percent. This matters as long-run accumulation of debt imposes costs, ranging from reduced private investment, high inflation, pressure on raising interest rates and a significant credit risk.
Pakistan’s debt to GDP ratio is contained compared to the developed economies – around 68 percent; however, our access to external borrowing with a below investment grade rating is severely limited compared to advanced economies. The budget for last fiscal year envisaged a debt servicing cost of 55 percent of total current expenditure which, in turn, accounted for 95 percent of total outlay. While in the current year the government has budgeted a smaller amount for debt servicing as a percentage of total current expenditure - at 50.5 percent – however, this is largely if not entirely premised on the expectation of a decline in the discount rate rather than any reduction in reliance on borrowing.
Successive Pakistan administrations have amassed a large external debt which today stands at USD 138 billion, as per government figures. Annual interest payments and principal as and when due was estimated at USD 20 billion in the budget for the current year. The fiscal deficit for last fiscal year was 7.4 trillion rupees, as per budget documents, and is budgeted at 6.5 trillion rupees for the current year. And, disturbingly, the bulk of the budgeted outlay is earmarked for current expenditure (which by definition is not spent on infrastructure development – physical or social) and is therefore not used for development purposes which, in turn, means it is not going to trigger higher growth.
One would hope that the incumbent government’s reform thrust would consider containment of current expenditure as a means to reduce the current heavy reliance on borrowing.
Copyright Business Recorder, 2026
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