Many economists believe that debt is not inherently destabilizing, at least theoretically. A country’s debt burden expands only when the nominal interest rate it pays consistently exceeds the pace of its economic growth, even if the government is running a primary surplus.
Hence, on paper, a country can have debt-to-GDP ratio of a 1000% and still pay off its liabilities, keeping the ratio constant. It is only when growth keeps up with a country’s liabilities that the overall burden can remain stable or even shrink. Economists formalize this as:
A(d)=(r-g)×d–p
Change in debt-to-GDP = (interest–growth gap × existing debt ratio) - primary surplus
Advanced economies, though having very high debt-to-GDP ratios continue to borrow due to this very reason. Debt, however, is highly addictive for any economy. As with any addictive substance, a healthy body can live with it, but once the body weakens, even small doses can become lethal. Pakistan never built the strength to manage its debt addiction.
Just recently, Pakistan borrowed approximately Rs 1.3 trillion from commercial banks, pushing its debt-to-GDP ratio higher to around 74 percent of the economy. At the same time, the growth rate, estimated at only 2.68 percent for FY 2024-25, according to the Pakistan Economic Survey, remains far too low to counterbalance the expanding burden.
Under healthier conditions, the economy grows fast enough to dilute the weight of past borrowing over time. That balance never materialized in Pakistan. With borrowing costs still much higher than the growth rate at 11 percent, the ratio continues to rise mechanically, where every additional rupee of debt grows heavier rather than lighter. The burden becomes overbearing as the state embarks on a spending spree financed largely through Treasury bills and bonds rather than through genuine, organic expansion.
To understand why Pakistan fails this simple arithmetic, we must examine the financial forces on both sides of the ratio: why interest remains elevated and why growth refuses to respond. As for interest rates, the SBP has been ultra-hawkish about monetary policy, especially after inflation has resurfaced post the monsoon floods.
CPI, as of October, has risen to 6.24 percent from 5.6 percent in September, mainly due to increasing food and energy prices. The condition relates to nominal growth, but real inflation continues to weigh on policy decisions.
Our monetary policy has apparently been driven by fears of inflation coupled with a destabilizing rupee, much at the cost of economic expansion. This has for the time being kept the rupee stable, but made borrowing super expensive for exporters, leaving our exports struggling.
Further rate cuts could encourage investment and improve export competitiveness, but for Pakistan this is like a double-edged sword; tightening the money supply helps keep the rupee stable, while loosening it creates inflation. The result is economic stagnation, where debt servicing costs rise at the expense of growth.
A major reason why growth does not revive is because nearly all available credit gets diverted toward the state. Scheduled banks invested roughly Rs 5.8 trillion in government securities during the first nine months of 2025 alone, while private-sector advances actually fell by over Rs 1.2 trillion over the same period.
Even corporates have joined the trade, placing surplus liquidity into risk-free government paper rather than new factories, exports, or jobs. This is the quiet crowding-out that no one wants to acknowledge. The government finances its expenditure almost entirely through Treasury bills and bonds.
Banks continue to earn safe profits and high returns, while the private sector is left starving for credit. It is a partnership that keeps the financial system profitable but leaves the broader economy without oxygen. Without fresh investment, growth remains dwarfed by rising domestic and external debt, as the state continues to spend unrestrained.
In the first quarter of FY 26, Pakistan surprisingly managed a consolidated fiscal surplus of Rs 2.12 trillion, equivalent to about 1.6 percent of GDP.
Reverting to our original argument about how debt levels can be maintained with positive growth and a primary surplus, this might seem like positive news, but only on paper. A lion’s share of this surplus was attributed to a sharp rise in petroleum levies as opposed to private-sector credit revival, export growth, or FDI. In other words, Pakistan’s apparent economic strength stems from an uncanny arrangement between the banking sector and the state, where debt addiction feeds inertia rather than real resilience.
This arrangement persists because the incentives are perfectly aligned against growth. Banks have little reason to take commercial risk when government paper delivers double-digit returns with virtually no chance of default. Every rupee that could fund a textile mill, an IT exporter, or a new manufacturing line instead gets recycled into treasury instruments.
The state becomes the safest and most profitable client in the country. Over time, banks shed the skills necessary to evaluate business plans or underwrite new ventures; they become passive holders of sovereign IOUs. The result is a financial sector that looks healthy on its balance sheet yet contributes remarkably little to production. Profits rise even as factories shut, capacity withers, and employment stagnates. Growth never recovers because the pipes that should carry capital to the real economy no longer function.
The outcome is a political economy in stasis. The government keeps borrowing because it must; banks keep lending because it pays. Neither side has any real incentive to change course. Fiscal reform is perpetually postponed because the state can roll over its obligations indefinitely through commercial banks, while banks collect coupons without ever touching the real economy. At the micro level, households face higher taxes, inflation, and shrinking real wages to support this silent bargain.
This is where Pakistan diverges from advanced economies that manage heavy borrowing. As discussed, debt only becomes endurable when growth keeps pace with the cost of servicing it. Japan’s example shows how high leverage can coexist with stability when that balance holds. Carrying one of the highest debt-to-GDP ratios in the world, Japan remains stable because its economy continued to grow, despite its debt obligations.
The state borrows aggressively, but financing costs stay low and predictable; banks and households willingly hold government securities, and industry continues to invest. The body remains conditioned, so the strain never turns poisonous. Even limited growth is reliable enough to keep the equation positive.
Debt does not overwhelm because the productive engine never fully shuts down. Japan’s stability owes less to rapid growth and more to its historically ultra-low borrowing costs and deep domestic savings pool, which allows the state to refinance cheaply.
Interestingly, Turkey is Pakistan’s only true twin, not only culturally and diplomatically, but also financially. Pakistan’s monetary policy closely resembles Turkey’s, which has among the highest interest rates in the world at 39.5 percent. Having a growth rate hovering around 3%, both countries risk sluggish economies with piling debt.
Yet the composition of the debt burden differs significantly; Turkey carries debt at roughly 25–30 percent of GDP, while Pakistan’s load sits closer to 74 percent of GDP. Where Turkey treads a dangerous path, it still owes less relative to the size of its economy and, crucially, faces lower interest obligations in proportion to GDP. Pakistan, on the other hand, confronts a smaller economic base with heavier interest payments, both domestic and external, leaving even less room to maneuver.
While domestic Pakistani banks have quietly profited by cycling deposits into government paper, the real economy remains starved of capital. Investment has stalled, wages have eroded, and unemployment, especially among youth, remains elevated.
The latest numbers confirm the squeeze. In the first four months of FY26, the trade deficit widened 38 percent year-on-year to around $12.6 billion, as exports slipped to roughly $10.45 billion while imports rose to nearly $23 billion. Higher inflation continues to keep the monetary policy tight, which keeps growth restrained. Every lever that could encourage expansion is trapped by the fear of inflation, currency volatility, or fiscal pressure.
In the end, the arithmetic hardly needs symbols. When the cost of money stays above the pace of economic expansion, the debt load grows heavier even if the state balances its primary budget.
The only way out is to let the economy strengthen faster than the obligation it carries; otherwise, the habit consumes the patient. Pakistan has yet to build that strength. That strength requires redirecting credit toward the productive economy, restoring growth capacity, and easing interest costs over time.
Copyright Business Recorder, 2025
The writer is an economist and an educationist