ISLAMABAD: Pakistan’s national debt has surged to an alarming Rs78.9 trillion, including Rs43.4 trillion in domestic debt and Rs32.9 trillion in external loans, exacerbating the country’s financial woes. This debt surge, coupled with a staggering fiscal deficit averaging 7.3% of the GDP over the past five years, has forced the government into a debt trap, compelling it to borrow more to service existing loans. This cycle has intensified fiscal pressures, leading to a significant rise in annual debt payments.
The fiscal strain is evident in the latest figures from the finance ministry. Initially, debt servicing was projected to hit Rs7.3 trillion, nearly 58% of the budgeted expenditure for the ongoing fiscal year. However, recent revisions indicate a sharp increase to Rs8.3 trillion. The Mid-Year Budget Review Report underscores these challenges, revealing a 64% spike in debt payments to Rs4.2 trillion in just the first six months of the fiscal year, driven by escalating domestic debt costs and a record-high interest rate of 22%.
The report highlights that debt servicing expenditures have dramatically outpaced tax revenue growth, severely curtailing development spending. The ministry attributes the escalating debt servicing costs primarily to elevated domestic interest rates. With the government financing nearly 80% of its fiscal deficit through commercial bank loans amidst dwindling foreign inflows, domestic debt payments accounted for almost 90% of total debt servicing costs in the first half of the fiscal year. The high cost of borrowing has had a ripple effect, stifling new private investment and stagnating economic growth.
While the report points to high interest rates as a significant factor in the debt servicing burden, it stops short of addressing the root cause: the government’s persistent failure to manage its fiscal deficit. The chronic deficit is the primary driver behind the burgeoning debt, necessitating continuous borrowing.
To mitigate the debt crisis, the government must focus on enhancing its tax-to-GDP ratio to meet global standards. This involves expanding the tax base to include untaxed and undertaxed sectors and curbing wasteful expenditures to reduce the fiscal deficit to sustainable levels. Only by addressing these structural issues can the government minimize its borrowing requirements and stabilize the economy.
The upcoming budget announcement will be a critical indicator of the government’s commitment to these necessary reforms. As the nation awaits, it remains to be seen whether the authorities will take decisive steps to break free from the debt trap and set Pakistan on a path to fiscal stability.