Naveed Rafaqat
Pakistan today faces a serious fiscal test as the weight of public debt continues to shape its economic trajectory. What was once a manageable obligation has now expanded into a structural challenge, consuming a large share of national resources and limiting the space for growth. Yet within this challenge lies an opportunity: if addressed with discipline and foresight, Pakistan can turn its debt burden into a catalyst for reform and sustainable progress.
According to official figures from the Ministry of Finance, Pakistan’s total public debt has crossed Rs. 67 trillion as of mid-2025, with external debt standing at around $87.4 billion (Rs. 24.5 trillion). Debt servicing alone consumes nearly half of the federal budget. Out of every Rs. 100 collected by the state, almost Rs. 50 goes toward repayment of loans and interest, leaving only the remaining half for education, health, infrastructure, and social protection. This imbalance highlights the urgency of action.
The upcoming repayment schedule underscores the challenge. For FY2025-26, Pakistan must repay about $23 billion in external debt, a daunting figure given that even after IMF inflows, foreign exchange reserves remain below three months of import cover. Without continued IMF partnership and rollover assurances from friendly countries such as China, Saudi Arabia, and the UAE, the risk of strain is high. However, Pakistan has proven its resilience before and retains the support of international partners who are keen to see credible reforms succeed.
The debt situation is not a recent development-it is the product of decades of financing deficits through borrowing rather than mobilizing adequate domestic resources. Fiscal deficits averaging between 5-7 percent of GDP have left little choice but to rely on both external and domestic borrowing. Domestic banks now hold substantial government debt, often crowding out private borrowers and limiting the scope for industrial expansion and job creation.
The weakness of the revenue system compounds this challenge. With a tax-to-GDP ratio of only 9.5 percent, Pakistan lags behind regional peers such as India (16 percent) and Bangladesh (12 percent). Instead of widening the tax base and ensuring that higher-income groups contribute fairly, the system has relied heavily on indirect taxation. This overburdens ordinary citizens without generating sufficient revenue. Expanding the tax net, improving compliance, and documenting the informal economy remain essential for closing this gap.
The impact of mounting debt is clear: fiscal sovereignty is eroded, dependency on external creditors grows, and domestic priorities suffer. IMF conditions shape subsidy policy and energy pricing, while scarce resources for development are redirected to debt servicing. At the same time, the cost of borrowing continues to rise, as global markets price in risk and domestic banks charge high rates due to elevated policy benchmarks. Each rupee borrowed today costs more to repay tomorrow, feeding the debt spiral.
Breaking this cycle requires a multipronged strategy. The first pillar must be serious fiscal consolidation-controlling unnecessary expenditure, curbing unbudgeted subsidies, and prioritizing development that delivers measurable returns. State-owned enterprises that drain the treasury need restructuring or privatization. The second pillar is revenue mobilization. Even a modest increase in Pakistan’s tax-to-GDP ratio could generate hundreds of billions of rupees annually, reducing the reliance on new borrowing. Digitization of tax collection, property record integration, and stronger enforcement can yield significant dividends.
The third pillar must be debt management and transparency. Publishing a clear debt strategy, focusing on long-term concessional financing, and reducing exposure to expensive short-term commercial loans can ease the repayment burden. Finally, growth revival is essential. Stronger productivity in agriculture, expansion of exports, and unleashing the potential of Pakistan’s IT sector can provide the revenues needed to make debt sustainable. Without growth, no fiscal strategy can succeed.
Importantly, Pakistan’s debt challenge should not be seen purely as a financial burden-it is also an opportunity to re-engineer the economy. Every rupee that goes to debt service today is a reminder of the reforms urgently needed to ensure tomorrow’s rupees go into schools, hospitals, and infrastructure instead. The IMF program, despite being politically unpopular, provides a framework for discipline and reform. International partners are willing to support Pakistan as long as reforms continue credibly. And Pakistan’s young population, strategic geography, and untapped sectors offer immense potential if backed by sound policies.
Pakistan cannot continue business as usual, borrowing endlessly to cover deficits. But if leaders seize this moment with courage, vision, and consensus, the tide can be turned. Mounting public debt is not simply an economic weakness-it is a wake-up call for Pakistan to strengthen governance, modernize its economy, and pursue self-reliance.
The writer is the director-general (Punjab Sahulat Bazaars Authority)
