Cost of fiscal stability

EDITORIAL: Since 2022, all budgets have been presented under the premiership of Shehbaz Sharif. The report card is mixed. Overall public debt and liabilities reached Rs98 trillion, or 77 percent of GDP. Within this, gross public debt stood at Rs86.7 trillion, up 76 percent over the last five years.

However, in terms of GDP, public debt has declined from 73.9 percent in FY22 to 68.3 percent, primarily due to the government running primary fiscal surpluses for three consecutive years.

Finally, the government is getting some fiscal space. The more important measure is not debt-to-GDP, but rather the government’s ability to service its debt. In FY22, debt servicing consumed 85 percent of net federal revenues, which worsened to 122 percent in FY23.

Thereafter, the government started running primary fiscal surpluses: 0.9 percent in FY24, 2.4 percent in FY25 and 2.9 percent in FY26. As a result, both the debt-to-GDP and debt-servicing-to-revenue ratios have declined. The latter has now fallen to 66 percent in FY26, almost half its level in FY23.

The journey was not easy, especially for taxpayers and employment seekers. The government doubled down on taxation on an already skewed tax base to generate additional revenues, mainly to service debt, at a time when monetary policy was tight and inflation was skyrocketing. The other element was suppressing development spending, which has resulted in lower growth and fewer employment opportunities.

Thus, although both debt-to-GDP and debt servicing-to-revenue ratios have declined, the concern is that higher taxation could choke private investment, while restrained development spending could constrain growth. This should be more of a worry for the government than a reason to celebrate.

The catch is not simply to lower debt, but to reduce borrowing for non-productive purposes. Over the past thirty years, Pakistan’s debt dynamics have been dismal compared with the rest of the world.

Pakistan’s debt-to-GDP ratio is not exceptionally high, but a majority of countries with higher debt ratios have recorded stronger GDP-per-capita growth than Pakistan. Pakistan is also an outlier in terms of the average ratio of interest payments to government revenues.

This is not sustainable. The government restructured its debt in the early 2000s and subsequently had another spell of running primary fiscal surpluses for six consecutive years, from FY99 to FY04. That provided some breathing room, but inefficient use of borrowed funds eventually took the country back to the tipping point in 2022-23.

Another reversal is now in the making. This may give us a few years of growth going forward.

However, without addressing the structural weaknesses, including broadening the tax base, improving spending on social indicators, reducing the government’s regulatory footprint, improving governance and enhancing national savings, these improvements are likely to be short-lived.

The point is that the government cannot focus on a singular metric of running fiscal surpluses, alongside tight monetary policy, to provide a platform for growth. That would offer only a short-lived reprieve, even if growth does materialise.

The focus should instead be on enhancing economic productivity through the right mix of policy measures.

However, there is little in sight. The celebration will likely remain focused on headline numbers that are largely driven by the IMF programme.

The finance ministry may highlight the reduction in the debt-to-GDP ratio, lower debt servicing-to-revenue, declining interest rates, a fiscal deficit at 22-year low, and consecutive primary fiscal surpluses.

The question, however, is: at what cost have these stabilisation gains been achieved? Poverty has risen over the past five years, investment has dwindled, and confidence in long-term economic stability has eroded. Without addressing these issues, it will simply be more of the same.

Copyright Business Recorder, 2026