Pakistan’s debt dilemma

In modern macroeconomics, public borrowing is neither an evil nor a virtue in itself. It is an instrument. Much depends upon the purpose for which debt is incurred, the efficiency with which borrowed capital is deployed, and the economy’s capacity to service that debt through sustained growth. The true danger lies not in borrowing alone, but in reckless borrowing unsupported by productivity, exports, institutional discipline and fiscal prudence.

Economists generally measure the sustainability of public borrowing through the debt-to-GDP ratio. This ratio compares a country’s total public debt with the size of its economy. A manageable ratio suggests that the economy possesses the productive capacity to honour its obligations. Conversely, an excessively high ratio may signal fiscal distress, inflationary pressures, weakening investor confidence and external vulnerability.

Borrowings are broadly divided into internal and external debt. Internal debt is raised domestically through treasury bills, bonds, and borrowings from commercial banks or central banks. External debt consists of loans from foreign governments, multilateral institutions such as the IMF and World Bank, international bond markets and bilateral creditors.

Internal borrowing has certain advantages. Since repayments are made in local currency, governments possess greater flexibility in debt management. Such borrowing also deepens domestic financial markets and mobilises idle savings into productive investment. However, excessive domestic borrowing may crowd out private investment by absorbing bank liquidity and raising interest rates. In developing countries, governments often become the largest borrowers from commercial banks, leaving little room for industrial and entrepreneurial expansion.

External borrowing presents a more delicate challenge. Foreign loans enable developing economies to finance infrastructure, energy projects, imports and balance-of-payments deficits without immediately printing money. Yet external debt exposes countries to exchange-rate risks. When domestic currencies depreciate, repayment obligations in dollars become substantially heavier. Many developing economies have entered cycles where fresh borrowing merely finances repayments of earlier loans.

The experience of the world’s major economies demonstrates that debt is sustainable only when supported by productivity and institutional credibility. Japan’s public debt exceeds 200 per cent of GDP, yet markets continue to trust the Japanese state because the debt is largely domestically held and supported by high national savings. China, despite rising debt levels, continues to maintain substantial industrial output, export competitiveness and foreign exchange reserves. The United States remains a special case because the dollar functions as the world’s reserve currency. American debt instruments are still considered global safe assets, giving Washington an extraordinary borrowing capacity unavailable to most countries.

It is, therefore, inappropriate to compare the United States directly with developing economies. The dollar effectively possesses the equivalent of a global reserve standard anchored in international confidence. Countries such as Pakistan cannot indefinitely finance fiscal indiscipline through currency expansion or sovereign borrowing without severe economic consequences.

Among South Asian economies, Bangladesh has thus far demonstrated the most prudent debt management. Its public debt remains close to 32 per cent of GDP, supported by consistent export growth, particularly in textiles and remittances. Although its external debt has risen sharply in recent years, Bangladesh has largely utilised borrowings for infrastructure and industrial growth. Consequently, its debt burden remains relatively manageable.

India presents a more complex picture. Its debt-to-GDP ratio is significantly higher, approaching nearly 82 per cent according to recent estimates. However, India’s vast domestic market, diversified industrial base, rising exports, technological sector and comparatively stronger institutional structures provide resilience. Importantly, a large portion of India’s debt is internally financed, thereby reducing exposure to external currency shocks. New Delhi has also increasingly shifted policy emphasis from fiscal deficit targets towards debt sustainability itself.

Pakistan’s situation is substantially more precarious. Public debt has climbed to nearly 83 per cent of GDP, while economic growth remains inconsistent and export performance weak. The country faces a dangerous combination of fiscal deficits, external account pressures, low tax mobilisation and chronic dependence on short-term external financing. Successive governments have often borrowed not for productivity-enhancing investments, but to finance consumption, subsidies, administrative expenditure and debt servicing itself.

The gravest concern for Pakistan is that debt servicing increasingly consumes a substantial portion of national revenues, leaving limited fiscal space for health, education, infrastructure and human development. Currency depreciation further intensifies external repayment burdens. Each cycle of rupee weakness enlarges the domestic cost of foreign obligations. The economy thus becomes trapped in a vicious cycle of IMF programmes, austerity measures and fresh borrowing.

Yet borrowing itself is not Pakistan’s principal enemy. The real challenge lies in the absence of productive economic transformation. Countries can sustain high debt levels when borrowings generate industrial growth, export competitiveness, energy security and productivity gains. China borrowed heavily during its infrastructure expansion phase, but simultaneously built manufacturing strength and export dominance. Pakistan, by contrast, has often failed to convert debt into durable economic capacity.

A safe and sustainable borrowing strategy requires adherence to several principles. First, governments must ensure that borrowed funds are directed primarily towards productive sectors capable of generating future revenues. Infrastructure, energy, logistics, education and export-oriented industries generally yield long-term economic returns.

Second, external borrowing should remain within manageable limits relative to export earnings and foreign exchange reserves. Excessive reliance on short-term commercial borrowing exposes economies to sudden crises.

Third, fiscal discipline is indispensable. Wasteful public expenditure, loss-making state enterprises and untargeted subsidies undermine debt sustainability.

Fourth, tax reforms remain essential. Pakistan’s persistently narrow tax base forces governments towards indirect taxation and perpetual borrowing. Without broadening revenue collection, debt accumulation becomes unavoidable.

Finally, political continuity and institutional credibility are critical. Investors and creditors lend not merely to economies, but to governance systems. Frequent policy reversals, corruption, and instability increase borrowing costs and weaken confidence.

Debt can accelerate development when guided by prudence, productivity, and discipline. But when debt substitutes reform, postpones structural corrections and finances consumption rather than growth, it becomes a silent instrument of national decline. Pakistan today stands precisely at that crossroads.

Copyright Business Recorder, 2026