The country is in a debt crisis that threatens its economic and social stability. It must pay billions in debt servicing, but the state’s coffers are almost empty.
Hit by political instability, Covid pandemic and devastating floods, the country’s import-dependent economy has been on the brink of default for months as the external debt burden mounts against shrinking foreign exchange reserves.
Pakistan’s total debt stocks have risen to an all-time high level of Rs59 trillion at the end of May 2023 because of massive borrowing from domestic and external resources.
According to the State Bank of Pakistan, the central government’s total debt (domestic and external) surged by 23 percent during the first 11 months of this fiscal year.
Some of Pakistan’s economic woes are internal and even self-inflicted; with main factors behind the debt increase were currency depreciation and external debt payments. Moreover, subsidies thrown around like confetti, for instance, as successive governments have failed to boost exports that would benefit the working class to balance high-end imports for the military and political elite.
Other causes are external. Russia’s invasion of Ukraine has strained global food supplies, leading to an uptick in prices while also choking off the supply of energy such as natural gas and oil.
The country runs a trade deficit, which results in a greater demand for foreign currencies in the Pakistan economy than the central bank can supply. When the government takes out loans from abroad, it increases the country’s foreign reserves, but also its debt obligations.
The debt problem has multiple consequences for its people and its future prospects. The high debt servicing costs consume most of the government’s revenues, leaving little room for development spending on health, education, and infrastructure. The high inflation rate, especially for food items, erodes the purchasing power of the masses and drives them to desperation. The low human development index reflects the poor quality of life and opportunities for the majority of Pakistanis.
As big the debt problem is, it is not insurmountable, but it requires urgent and comprehensive action from the government and the society. Pakistan needs to diversify its economy, boost its exports, attract foreign direct investment, improve its tax collection, reduce its military expenditure, enhance its human capital, and negotiate better terms with its creditors. The nation also needs to foster a culture of accountability, transparency, and innovation that can create value and reduce dependence on external sources.
