Skyrocketing Debt

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Pakistan’s debt crisis has been in the making for decades now, but the problem has now intensified at an exceedingly fast rate. In the two years since the pandemic, Pakistan has witnessed the worst of the worst–mounting unemployment, high inflation and negative growth–raising the country’s external debt to a whopping Rs. 62.5 trillion. At the start of the year, the International Monetary Fund had projected a minor decline in the country’s debt. Government spending was also expected to decrease this year, but that did not happen. The country was still reeling from the madness surrounding Russia’s invasion of Ukraine when it was hit by the worst torrential floods in its history, triggering an economic crisis of dystopian proportions.
As per the instructions of the UN, Prime Minister Shehbaz Sharif has already taken to the international stage to request debt relief from major creditors as it wrestles with the aftermath of its most recent climate disaster, but to no avail. With the appreciation of the US dollar against many currencies both in the developed world and emerging markets, the price of imported goods is higher than ever; tightening economic conditions for countries in the Global South, such as Pakistan.
Debt servicing appears to be the biggest problem for the government, compelling the country to borrow even more money to pay off its existing debts. Low tax revenues against large government expenditures on unfeasible projects create the perfect recipe for economic mismanagement-with a tax revenue gap of 10 per cent, it is not surprising that the country is in so much trouble. The taxpayer money that we do collect is immediately diverted to foreign debt-servicing, leaving no funds for public goods. In the meantime, we continue to rely on external borrowing as opposed to investing in domestic institutions that could provide us with a safety valve during times like these. Pakistan’s biggest creditor, China who has invested more than $60 billion in Gwadar, is growing exasperated with low returns on its investment, as evidenced by recent disagreements between the two countries over interest rates, leading Beijing to postpone all CPEC meetings with Islamabad.
In order to escape its circular debt crisis, it is imperative that Pakistan revise its frameworks for tax collection and restructure its energy pricing mechanisms. Pakistan is already on the Financial Action Task Force’s ‘grey list’, which has seriously undermined our credibility abroad. Without effective debt restructuring, the country will remain trapped in an economic death spiral that could send it shooting toward a recession and threaten its very survival.