Ayesha Saba

Pakistan's domestic and external debts have reached alarming levels as the country grapples with repayments and servicing costs. The government has to focus on capital formation and development projects that will expand its GDP and strengthen the debt-repaying capacity. Haroon Sharif, former chairman of Board of Investment and a renowned economic expert, said this while talking to WealthPK. “In the complex realm of global finance, Pakistan finds itself ensnared in a challenging debt crisis. The problem is that the country's debt has grown to 80% of its GDP,” he said. “A percentage nearing 100 indicates the government’s inability to pay its debt. This precarious situation has set off alarm bells, triggering legitimate concerns about the long-term sustainability of Pakistan's economic future. “However, it is pertinent to point out that the most developed economies have a much higher debt-to-GDP ratio than developing economies.

For example, the national debt-to-GDP ratio of the US in 2019 was 108%, while Japan has the highest ratio in the world at 234%,” he added. Sharif lamented that “Pakistan's debt becomes problematic or unsustainable when it is utilized for current expenditures, meaning short-term recurrent spending. The development sector accounts for only 10% of the government's budget, which indicates that most of the debt taken by the government is used to fund the current expenditures. This is what makes Pakistan's debt problematic. “However, when it is utilized for development activities or capital formation, it is considered as sustainable because investment on infrastructure will create future benefits and contribute towards the economy,” he explained. “Because of high debt inflow and inadequate utilization of resources for development activities, Pakistan has amassed not only a lot of debt to be paid in principal but also debt servicing with interest to be paid,” he stated.

“The strategic redirection of borrowed funds towards capital formation and development projects is considered crucial for Pakistan's economic sustainability and needs of the hour,” he emphasized. “The government should prioritize projects that have a substantial impact on economic growth and productivity. This includes investments in infrastructure, technology, education, and healthcare. Rigorous project evaluation processes should be in place to ensure optimal utilization of funds.” On the domestic front, he advocated for prudent fiscal management, emphasizing the importance of aligning government spending with revenue generation. Structural reforms aimed at improving the business environment, enhancing tax collection mechanisms, and curbing unnecessary expenditures could contribute to a more sustainable economic model, he suggested.

Credit: INP-WealthPk