Debt and GDP

Current expenditure, estimated at 16.2 percent of Gross Domestic Product (GDP) July-June 2025-26, comprising over 93 percent of 2026-27 budget, is acknowledged as the root cause of the country’s intractable deficit compelling subsequent governments to borrow ever larger amounts from the domestic and international marketplace.

This estimate was revealed this week past, nearly 45 days after the end of the fiscal year 2025-26, with the Ministry of Finance uploading the summary of consolidated federal and provincial fiscal operations for last fiscal year, though it judiciously gave itself a possible manipulation, if required, by stating that the data was provisional.

One fourth of the rise in current expenditure was attributed to mark-up payments – 5.5 percent – and 2.0 percent to defence. Or, a total of 7.5 percent out of 16.2 percent for items that are considered beyond the purview of any government given that default on payment of interest (on borrowing as well as principal as and when due) pushes a country towards default (an unacceptable outcome given the literature on the devastating fallout on other countries that have defaulted) while the spike in terror activities has left Pakistan with no option but to meet all associated operational expenses of law enforcement agencies.

The question as to what is the source of the rise in mark-up in current expenditure? The total outlay on mark-up July-June is noted at 6.947 trillion rupees in the released consolidated provisional data with the following federal and provincial governments’ contributions: Federal 6.030 trillion rupees, and total provincial mark-up payment to federal government at 93.792 billion rupees (Punjab’s share at 43.49 billion rupees, Sindh’s share at 31.38 billion rupees, Khyber Pakhtunkhwa’s share of 17.23 billion rupees and Balochistan’s share of 1.68 billion rupees).

Two observations are critical. First, Pakistan’s policy rate, currently at 11.5 percent, is higher than other regional countries (including Sri Lanka which at present has a policy rate of 8.75 percent, a country which declared a default on its sovereign debt four years ago and Bangladesh’s 9.5 percent, a country which underwent a political upheaval around two years ago.) Pakistan’s government investment bonds (PIBs) yield is at 11.96 percent, and short-term paper (3 months) carries a weighted average yield of around 11.42 percent (close to the State Bank of Pakistan policy rate). This rate is much in excess to the rates prevalent in two of the regional competing countries; notably, India at 5.25 percent and China with a seven-day rate of 1.4 percent.

Any comparison with the US would be meaningless, given the wide range of disparities between the two economies. However, it is relevant to document the fact the rate at which the US is borrowing from the market is much lower than what is available to Pakistan due to the dollar largely continuing to be a major global reserve currency, though its previous dominant role is increasingly under threat. This led US Treasury Secretary Scott Bessent to lean unusually hard on the cheaper rate (on 5 August 2026 the yield of the three-month bill was 3.8 percent, for a ten-year bill 4.6 percent and 30-year bill above 5 percent), thereby successfully financing roughly 2 trillion-dollar deficit. However, while this kept the budgeted borrowing costs low yet it exposed US consumers to higher inflation and rising rates.

The justification for borrowing by Pakistan is to cite a debt-to-GDP ratio of between 70 and 74 percent subject to the nominal GDP calculations – a rate that compares favourably with Western countries that have easy access to credit based on their fundamental macroeconomic indicators, including their investment grade ratings (unlike Pakistan) and/or their membership of major organizations like the European Union.

The debt to GDP ratio for the US is 124 percent, Greece 149 percent, France 138 percent, Italy 137 percent, Belgium 106 percent, and the UK 103 percent.

Regional countries registered a gross debt to GDP ratio as per the IMF data as follows: India 106.9 percent, Sri Lanka (no data available for the current year though other sources revealed a rate of 89.7 percent), Bangladesh 41.8 percent, and China 106.9 percent. China and India have large foreign exchange reserves unlike Pakistan.

In April 2026, an IMF publication titled Fiscal Policy Under Pressure: High Debt, Rising Risks notes that “Global public debt rose to just under 94 percent of GDP in 2025 and is set to reach 100 percent by 2029, one year earlier than projected in April 2025. This accumulation is driven largely by the world’s major economies.

Public finances are under strain from mounting spending pressures—on social needs, defence, and strategic autonomy—and rising interest burdens. The fiscal consequences of the Middle East conflict add further to these fragilities.

Structural shifts in sovereign debt markets—including the growing role of leveraged nonbank intermediaries and erosion of the U.S. Treasury’s safety premium—are amplifying vulnerability to repricing.”

The report further notes that: “the gap between resilient and vulnerable emerging market economies continues to widen. For countries facing tighter financing conditions, credible consolidation and predictable rules remain the foundation for regaining market confidence.

Eliminating costly fuel subsidies (Angola) and mobilizing revenue by rationalizing tax expenditures and broadening the tax base (Pakistan, Sri Lanka) are central to credible medium-term fiscal plans.

Addressing contingent liabilities is equally important: SOE reforms that limit government guarantees (South Africa), reduce transfers, and improve financial monitoring and reporting (Barbados) are critical to prevent future debt surprises, as are continued efforts to strengthen disaster-risk financing and climate resilient infrastructure (The Bahamas, Grenada)” – areas of concern for Pakistan even though the Fund did not expressly mention’s the country.

To conclude, Pakistan needs to abandon its long-term past practice, that continues to this day, to borrow to meet its current expenditure and, instead, it must cut its current expenditure to reduce its budget deficits and provide breathing space to not only the productive sectors to spearhead growth (without the need to follow several contractionary fiscal and monetary policies as dictated by borrowers, multilateral and bilateral, but also to formulate and implement in house holistic tax and power sector reforms.

Copyright Business Recorder, 2026