Moaaz Manzoor

Pakistan's rising debt burden, driven by high-interest payments, short-term borrowing, and unsustainable fiscal policies, poses significant economic risks, necessitating urgent structural reforms and disciplined financial management to avoid a deepening crisis, reports WealthPK.

The public debt rose by Rs2.73 trillion (4.0%) in the first half of FY25, reaching Rs71.6 trillion by December 2024. The domestic debt climbed to Rs49.88 trillion (up 17.1% YoY), while the external debt stood at Rs21.76 trillion (down 3.7% YoY). In Q2 (October-December), the budget deficit hit 2.8% of GDP (Rs3.4 trillion), and interest expenses surged 35% YoY to Rs3.8 trillion. Total debt and liabilities reached Rs88 trillion, while the external debt and liabilities stood at $131.06 billion.

Speaking with WealthPK, Dr. Junaid Ahmed, Senior Research Economist at the Pakistan Institute of Development Economics (PIDE), highlighted the fundamental issue in Pakistan’s debt management, emphasizing that borrowing should be directed toward productive investments rather than politically-driven projects. He pointed out that while countries like Japan and the US carried significant debt, they effectively utilized it for economic growth, ensuring their capacity to repay.

In contrast, Pakistan’s debt burden is exacerbated by loans used for consumption and politically-motivated infrastructure projects that do not generate sufficient returns. Reliance on continuous borrowing, mainly to service existing debt, has led to a cycle of unsustainable liabilities. The government’s shift toward long-term debt instruments, such as federal bonds, could mitigate short-term refinancing risks, but the overall debt burden remains a pressing challenge.

Dr. Ikram Ul Haq, a tax expert and adjunct faculty at the Lahore University of Management Sciences (LUMS), underscored the importance of responsible debt management in preventing economic instability. He pointed out that Pakistan’s public debt had already surpassed the sustainable ceiling of 60% of GDP set by the Fiscal Responsibility and Debt Limitation Act, 2005, reaching 67.5% of GDP in FY24 — well above the mandated threshold.

He warned that excessive borrowing, coupled with high-interest payments (which reached Rs8.2 trillion in FY24), is straining the fiscal space, reducing funds available for development, and fueling inflation. Pakistan’s increasing reliance on short-term domestic borrowing has also intensified liquidity risks, while external debt obligations remain a significant concern, with upcoming maturities exceeding $7 billion in 2025.

He emphasized that Pakistan risks further economic instability, declining investor confidence, and reduced financial sovereignty without strict fiscal discipline, improved tax collection, and structural reforms. The rising debt burden signals deeper structural challenges in Pakistan’s economic governance.

Without shifting towards productive investments and strengthening revenue generation, the country will remain trapped in a cycle of borrowing to repay past debts. Effective debt management and policy reforms are essential to prevent fiscal deterioration and restore investor confidence.

Credit: INP-WealthPk