Moaaz Manzoor

Pakistan's economic solvency is threatened by the burgeoning domestic debt, Dr. Sajid Amin Javed, Deputy Executive Director and founding director of the Policy Solutions Lab at the Sustainable Development Policy Institute (SDPI), told WealthPK in an interview. He said exponential domestic borrowing will significantly damage the country's financial stability. "Domestic borrowing is a pivotal concern, and few people are talking about it. This situation might worsen in the near future and rank among Pakistan's most urgent economic issues,” he sounded a note of caution. Pakistan's domestic debt has grown over time because the government's growing reliance on domestic borrowing to pay for spending has worsened its financial problems.

Dr. Sajid stressed that this reliance on domestic borrowing will have significant ramifications, as policymakers will probably be forced to rely more heavily on indirect taxes like GST to raise additional revenue. "With time, the issue of domestic borrowing will get worse and affect indirect taxes like the General Sales Tax (GST) which is linked to the price levels," he stated. Similarly, according to a document released by the State Bank of Pakistan (SBP), domestic debt stands at Rs71 trillion, comprising over Rs47 trillion in domestic loans and more than Rs24 trillion in foreign debt. This means 66% of the total debt is domestic, while 34% is foreign by June 2024. Additionally, debt servicing of $26 billion, including $4 billion interest, will be made this fiscal year (FY25).

Dr. Sajid noted that "a reduction in interest rates and inflation will reduce the payment cost," expressing some confidence despite these challenges. Lower inflation could help stabilize prices, easing the tax burden on consumers, while lower interest rates would reduce borrowing costs. However, he emphasized that these measures offer only short-term relief. As Pakistan’s domestic debt grows, the implications are clear: the government must find sustainable ways to manage its finances and reduce reliance on borrowing. The growing debt load could crowd out funds needed for critical sectors such as education, healthcare, and infrastructure. Experts like Dr. Sajid are urging policymakers to take proactive measures to address the root causes of rising debt.

“If the domestic borrowing is not controlled, it will continue to create challenges for fiscal management, and the effects will be felt through the higher taxes and reduced public spending,” he said. The surge in domestic debt has now become a pressing issue that must be dealt with through sound fiscal management and policy reforms. Without these, Pakistan’s economic outlook may face significant strain. The ramifications of Pakistan's growing domestic debt are apparent: the government must identify long-term financial management strategies to lessen its dependency on borrowing. The mounting debt load may make allocating money for vital industries like infrastructure, healthcare, and education more difficult. As the domestic debt has skyrocketed, it can undo the GDP gains. Hence, it is becoming an urgent problem that requires prudent fiscal management and legislative changes.

Credit: INP-WealthPk