Pakistan faces a severe debt crisis with $250 billion owed, risking economic collapse, sovereignty loss, and burdening future generations without reforms
Dr Moonis Ahmar
According to the reports, Pakistan’s total debt as of now stood at $250 billion, which is around 78% of its Gross Domestic Product. During the financial year 2025–26, Pakistan needs to pay 26 billion dollars to its foreign creditors, namely China, Saudi Arabia, U.A.E., International Monetary Fund, World Bank, Asian Development Bank and other lenders. Total foreign exchange reserves of Pakistan with the State Bank are around 14.9 billion dollars, which means that it will be a daunting task for Islamabad to meet its growing debt obligations
According to Topline Securities, Pakistan will need to arrange net financing of $10 billion, comprising $6 billion principal and $4 billion interest. That will only be possible if 16 billion dollars credited to Pakistan from various lenders is rolled over. The dangerous scenario emanating from Pakistan’s huge debt is having adverse implications on its economy, compelling the government to periodically increase prices of fuel, gas, electricity and other essential items. As a result, 250 million people of Pakistan are overburdened and their present and future generations will continue to be under a debt burden.
There are various examples to prove that countries with enormous debt were able to get out of huge debt trap by augmenting their exports, controlling expenditures, enhancing tax to GDP ratio and exploring various measures to repay and get over debt. Pakistan’s predicament is that huge amounts of foreign and domestic debt cause a huge drain on its resources. The United States is the largest debtor country of the world with net debt of 37 trillion dollars, but the American economy is more than 17 trillion dollars and the dollar is a global currency. In that case, enormous wealth in the United States, despite its 37 trillion dollars of debt, doesn’t heavily impact on its economy. But a country like Pakistan, with an economy of 341 billion dollars but with a debt of $250 billion, cannot survive because around 50% of its annual budget is consumed to pay both internal and external debt.
How can Pakistan deal with the growing debt trap, and why was the mushrooming of both foreign and domestic debt not handled by successive governments? Has the government formulated any policy and strategy to repay debts so as to save resources consumed to take care of foreign and domestic debt?
When the debt-to-GDP ratio is more than 70%, how can Pakistan ensure its sovereignty and pursue an independent foreign policy?
If one, at a glance, reviews Pakistan’s debt history, it is clear that its mushrooming took place after 1988 and more particularly following the exit of President Pervez Musharraf from the presidency in 2008. For instance, in 2008 when the PPP regime came to power, Pakistan’s debt was Rs. 6,435 billion, which increased by 135% in 2013 to Rs. 15,096 billion. According to the reports, from 2013 to 2018, during the PML (N) government, Pakistan’s external debt increased from US$52.4 billion to US$75.3 billion, an increase of 144 percent, mainly due to the China-Pakistan Economic Corridor. After the 2018 general elections, Imran Khan came to power. During his rule of 3 years, Pakistani external debt increased from US$75.3 billion to US$110.6 billion, an increase of 35.3 billion USD (214 percent). According to a report by the International Monetary Fund, Pakistan owes China 30% of its foreign debt. China has now become the biggest bilateral lender to Pakistan, surpassing all other creditors.
As of June 2023, total public debt and liabilities of Pakistan are estimated to be about Rs. 62.881 trillion / US$223.86 billion, which are 74.3 percent of the Gross Domestic Product (GDP) of Pakistan. About Rs. 24.309 trillion (US$87.24 billion as of June 2024) is owed by the government to domestic creditors, and about Rs. 1.67 trillion / $6 billion is owed by Public Sector Enterprises (PSEs). The largest chunk of Pakistan’s foreign debt is from the People’s Republic of China because in the last 11 years, under CPEC, Beijing gave billions of dollars of loans to Pakistan for infrastructure and energy development. A chunk of that loan was rolled over by China, but still Pakistan’s debt burden has grown enormously under the China-Pakistan Economic Corridor. In addition to this, there is IMF’s $7 billion bailout package programme for Pakistan, which has imposed painful conditions like reducing subsidies and enhancing taxes on petroleum, gas, electricity and other utility services. It means the people of Pakistan will continue to face hardships because of the huge debt burden.
One needs to understand and analyse the vicious cycle of Pakistan’s debt trap and its lethal implications on 250 million people of the country from three sides. First, a country which is heavily dependent on foreign debt is in a compromising position. Its sovereignty and capacity to make independent decisions is also compromised. This is exactly what has happened in the case of Pakistan, because for decades it has been on dole and dependent on seeking loans from creditors but doing nothing to ease its debt burden. As a result, Pakistan cannot take an independent stance on foreign policy matters and faces dictation by the IMF and other external creditors.
Why can’t China, South Korea, Singapore or U.A.E. be dictated by foreign powers? Because their economy is not mortgaged. When the debt-to-GDP ratio is more than 70%, how can Pakistan ensure its sovereignty and pursue an independent foreign policy? Now and then, Pakistan approaches IMF, World Bank, Asian Development Bank and other multilateral agencies to seek more and more loans because its economic space is limited. Likewise, Pakistan has to periodically approach China, Saudi Arabia and the U.A.E. for rollover of billions of dollars of loans, which tends to compromise on its sovereignty.
As long as the culture of corruption and nepotism receives official patronage, the debt trap cannot be handled nor will there be light at the end of the tunnel
Second, the vicious cycle of debt leads to indifference on the part of state authorities who accept this menace with no plausible efforts to get rid of a thing which is a stigma on the people of Pakistan. Instead of being ashamed that now and then the ruling elites go with a begging bowl to various lenders asking for more and more loans, debt has become part of the national culture.
When there is news that the U.A.E., Saudi Arabia, China or the IMF has granted a loan to Pakistan, it is termed as an achievement. The media covers news that getting loans from a country or a lending agency like IMF or the World Bank is called an accomplishment and a source of pride instead of shame for the country. Instead of feeling embarrassed or ashamed about taking loans, national institutions and the ruling coalition call it a sign of confidence in their government. As a result, national pride and respect is shattered when a country goes with a begging bowl asking for loans. The culture of accepting and feeling honoured after getting a loan or loans means self-respect of a nation is gone.
Third, the implications of the debt trap are enormous, and Pakistan is facing loss of its sovereignty and economic hardship in the shape of a massive increase in the prices of utilities. Unfortunately, no government in the last five decades has formulated a policy and strategy to deal with the growing debt trap. On the contrary, seeking loans to meet budget deficits and meet expenditures is considered a normal routine. There is no realisation on the part of power elites that sinking deeper and deeper in a debt trap will shatter the country’s economy and put a burden on present and future generations of Pakistan. Debt is considered a shortcut measure to pay for national expenditures. Foreign loans are sought to just pay interest on existing borrowed loans.
If the trend to ignore debt trap and its implications continues, the outcome will be erosion of per capita income; decline in foreign exchange reserves and more dependence on foreign sources to borrow more and more money.
Four-pronged strategy to deal with growing debt trap is: first, augmenting exports to 200 billion dollars in two years; controlling expenditures at the earliest; focusing on the policy of self-reliance instead of imports; and controlling the culture of corruption and nepotism.
The examples of China and India of self-reliance need to be taken seriously. China’s exports are around 3.4 trillion dollars, and India’s exports are 455 billion dollars. Likewise, China’s foreign exchange reserves are $3.3 trillion, and India’s foreign exchange reserves are 702 billion dollars. As compared to China and India, Pakistan’s exports are around $30 billion, and its foreign exchange reserves are less than $15 billion. Whereas five decades ago, Pakistan’s economy was better than China and India in economic growth rate and per capita income, since the late 1970s, there is a downward trend in exports, foreign exchange reserves and overall economic performance. Till the early 1970s, Pakistan’s economy was a role model for many countries of the world. Not anymore!
If the prevailing trend continues to rely on foreign loans, the result will be further sinking of Pakistan’s economy, having adverse implications on the quality of life of people, governance and rule of law. As long as the culture of corruption and nepotism receives official patronage, the debt trap cannot be handled nor will there be light at the end of the tunnel. Bold measures to pull the country from decades of economic stagnancy would require a leadership which is bold, hardworking, intelligent, and honest with clarity, commitment, dedication and not above accountability.
Courtesy The Friday Times Pakistan (This is an article of The Friday Times Pakistan on 02.08.2025)
