Pakistan’s debt story has become a grim chronicle of missed opportunities, persistent mismanagement and recurring crises that have steadily eroded the foundations of economic sovereignty.
The fragile fiscal account is inundated by debt servicing, consuming a disproportionate share of resources and leaving only a narrow space for human-centric development expenditure. The latest figures starkly lay bare the scale of the problem.
In FY25 alone, Pakistan’s public debt surged by Rs9.3 trillion, reaching a record Rs80.5 trillion by June – an average of Rs25.4 billion added every day. Debt now stands at 70.2 per cent of GDP, reversing the brief decline to 67.8 per cent in FY24 from 75.2 per cent in FY23, largely driven by lower inflation that slowed nominal GDP growth. The rise breaches statutory limits under the Fiscal Responsibility and Debt Limitation Act, underscoring how legal and political commitments to restraint collapse under fiscal stress. With debt expanding 13 per cent in both FY24 and FY25 (after 28 per cent in FY23 and 24 per cent in FY22), the limited fiscal space leaves little room to absorb shocks: any return of the primary deficit to historical levels could push the debt-to-GDP ratio further above the 70 per cent threshold, endangering sustainability.
The rapid accumulation of debt reflects poor fiscal discipline and the crushing weight of interest payments that swallow over half of federal expenditures, leaving little for development or social protection. Development spending has fallen to just 11 per cent of the budget, down from over 20 per cent less than two decades ago.
The PSDP, initially set at Rs1.4 trillion, was cut repeatedly and actual spending fell to Rs905 billion, almost Rs500 billion short of plan. And all the more, this year’s start is even bleaker, with only Rs5.3 billion spent in the first two months, barely 0.5 per cent of the Rs1 trillion allocation. When every rupee collected goes to past liabilities instead of future investments, the state erodes its ability to grow, create jobs and provide security.
Pakistan’s debt overhang is daunting even in normal times, but recent floods have worsened the crisis. Preliminary losses are estimated at Rs500 billion, likely to rise after complete assessments. Entire districts face shattered livelihoods with rehabilitation needs far beyond the country’s means. While floods are recurring, fiscal space for recovery has never been tighter, with growth now expected to be just 0–1 per cent, against a budgeted 4.2 per cent and an IMF target of 3.5 per cent. The government must either divert scarce funds with IMF consent or borrow more, deepening the debt spiral and leaving victims as collateral damage of persistent fiscal mismanagement.
The global debt landscape compounds these challenges. Low-Income Countries (LICs) now spend more on debt servicing than on education, health, safe water, sanitation, or climate action, a crisis affecting over three billion people. Public debt worldwide has soared to $100 trillion, nearly 93 per cent of global GDP, with developing countries like Pakistan paying borrowing costs two to four times higher than the US and up to twelve times higher than Germany. In this environment, external assistance is harder to secure, market borrowing increasingly punitive and Pakistan faces global tightening and domestic fragility.
The roots of this predicament run deep. Since the 1970s, Pakistan has pursued expansionary fiscal policies funded by external borrowing and concessional credits. Development spending and investments in public enterprises created a facade of growth, but without corresponding domestic revenue mobilisation, deficits widened and debt accumulated.
Structural tax weaknesses – preferential exemptions, reliance on indirect taxation, resistance to agricultural income tax and widespread evasion – have kept the tax-to-GDP ratio currently above 10 per cent. This is well below the 15 per cent tipping point observed in middle-income developing countries and significantly behind countries such as Azerbaijan (18 per cent), Cambodia (13.5 per cent), Sri Lanka (13 per cent) and the 28 per cent or higher levels seen in mature Western economies.
Today, indirect taxes account for the majority of total tax revenue – nearly 80 per cent of the budgeted target, with 60 per cent from identified indirect taxes and 75–80 per cent of direct taxes collected via withholding taxes – imposing a regressive burden on the poor. Keep in mind: the lowest income decile pays more than a quarter of its earnings in taxes and electricity bills, while elite privileges and tax expenditures consume Rs5.8 trillion annually. The FBR’s acknowledgement of a Rs3.6 trillion sales tax gap, nearly equal to the previous year’s total collection, highlights structural weaknesses in Pakistan’s tax system. Attributing the shortfall to the retail sector’s fragmentation and informality shows the state’s limited enforcement capacity and its reluctance to pursue politically costly reforms.
Meanwhile, state-owned enterprises (SOEs) continue to bleed public finances, with the top loss-making SOEs incurring losses of Rs5.89 trillion in the first half of FY2024-25, about six times the Budget 2026 allocation for development expenditure. The power sector remains a black hole, plagued by debilitating grid demand, reliance on imported PV and BESS, high transmission and distribution losses, commercial inefficiencies, capacity payments to independent power producers under ironclad contracts, and tariff distortions that both discourage efficiency and burden consumers. The result is a mounting circular debt: as of July 2025, the stock stood at Rs1.66 trillion (1.4 per cent of GDP).
Fiscal federalism adds another layer of complexity. Under the 7th NFC Award, provinces now receive 57.5 per cent of divisible pool revenues, a share constitutionally protected. The federal government shoulders debt servicing, defense and national programmes but is left with limited revenues, creating what some economists describe as a ‘closed loop’ of fiscal repression. Provinces enjoy guaranteed transfers while posting surpluses but resist calls to share the burden of disaster relief or national projects. The result is a fractured fiscal architecture where accountability is diffuse, incentives are misaligned and debt piles up unchecked.
Breaking the cycle requires comprehensive structural reforms. Broadening the tax base by including agriculture, real estate and wholesale trade, while phasing out elite exemptions, is essential. Energy reforms must target contract renegotiation, loss reduction and tariff rationalisation. SOEs should be restructured through corporatisation, privatisation or closure, supported by debt-to-equity swaps to restore viability and attract investment. On the financing side, debt management should prioritise longer maturities, diversified instruments (such as Sukuk and floating-rate securities), and the development of a deeper bond market. Reliance on short-term borrowing should be minimised, while low-interest and risk-sharing mechanisms, including Islamic finance, should be more fully leveraged.
Equally critical are political reforms. Pakistan’s elites must shift from short-term populism toward long-term wealth creation through sustainable growth. This requires curbing wasteful spending, realigning fiscal incentives with development goals, and enforcing accountability to deter free riding. The 11th NFC should advance fiscal decentralisation beyond provinces, empowering local governments with predictable, performance-linked transfers tied to poverty reduction, revenue mobilisation, environmental sustainability and gender equity. In the absence of genuine political will, technical adjustments will remain superficial.
The costs of inaction are stark: entrenched stagflation, weak growth, rising poverty, and recurring IMF bailouts that erode both public trust and investor confidence. With each year of delay, the debt burden compounds, adding trillions to liabilities, billions to servicing costs and millions to the ranks of the poor, while the window for corrective action rapidly narrows.
Debt can be productive if used for growth-enhancing investments, but Pakistan has borrowed to fund consumption, inefficiency and elite capture. Without urgent economic and governance reforms, the debt spiral will persist, weakening the state, shrinking the economy and impoverishing the people.
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