Public Debt

Articles
Pakistan's Debt Sustainability: Challenges, Risks, and
Strategic Decisions (September 10, 2024)
Introduction
As Pakistan seeks a position on the IMF Board’s agenda, it is crucial to reflect on the
sustainability of its sovereign debt. Pakistan has historically been categorized among the
'commitment type' of borrowers—nations that are less likely to default—due to its persistent
efforts to maintain fiscal discipline. However, several factors have contributed to Pakistan's
ongoing struggle with debt management, placing the country at continuous risk of unsustainable
debt accumulation.
This summary explores the key determinants of debt sustainability, evaluates Pakistan’s debt
structure, and assesses the broader political and economic influences on Pakistan’s debt
repayment decisions.

Understanding Debt Sustainability: The 'i-g' Differential

Debt sustainability is commonly measured through the ‘i-g’ differential, which refers to the
difference between the average interest rate on government debt (i) and the GDP growth rate (g).
When this differential is negative, it implies that the economy is growing faster than the interest
on its debt, enabling governments to manage their debt more effectively, even with budget
deficits. However, Pakistan has had a negative ‘i-g’ differential only once in the last decade,
meaning its interest rates have generally outpaced economic growth. In five of the last ten years,
the differential was over 10 percentage points, which has contributed to a consistent rise in the
markup payments to GDP ratio.

Key Drivers of Pakistan’s Debt Accumulation

1. High Public Debt Levels
One primary cause of Pakistan's persistent debt problem is the significant accumulation of public
debt. A high stock of public debt increases the risk premium on government bonds, resulting in
higher interest rates. This risk premium exists because investors demand greater returns for
lending to a country perceived as risky, which drives up borrowing costs for Pakistan. The
accumulation of debt also leads to a crowding-out effect, where high-yield government securities
attract credit away from productive sectors of the economy, reducing overall productivity and
economic output.
  Banking Sector Misallocation: In Pakistan, the misallocation of credit is evident in the
banking sector. Investments by banks have more than doubled advances, with over 90%
of those investments directed toward government securities. This deprives the private
sector of the financing it needs for productive investment, further constraining economic
growth.
2. Low Savings Rate and High Dependency Ratio
Countries with a high dependency ratio—more dependents relative to the working-age
population—often experience lower interest rates, as an aging population tends to save more.
However, Pakistan’s dynamics differ due to its low savings rate. Despite a dependency ratio 12
percentage points higher than the average for lower-middle-income countries, Pakistan’s
savings-to-GDP ratio is only 13%, compared to the average of 19.2% for comparable nations.
This lower savings rate contributes to persistently high interest rates and exacerbates debt
sustainability issues.

External vs. Domestic Debt: The Composition Challenge

Debt sustainability also depends heavily on the composition of a country’s debt—whether it is
primarily external or domestic, and whether it is long-term or short-term. Countries with high
external debt-to-GDP ratios are often more vulnerable to default, especially during periods of
economic downturns. Recent global cases, such as Sri Lanka’s default, highlight the risks of high
external debt, which was triggered by a depletion of foreign reserves and an inability to secure
timely financial assistance.
1. Pakistan’s External Debt Challenges
In the last five years, Pakistan's external debt-to-GDP ratio reached a record 37.6%, driven by the
depreciation of the Pakistani rupee, slow economic growth, and reliance on external loans to
finance infrastructure projects and current account deficits. This elevated level of external debt
has significantly heightened Pakistan’s default risk.
2. Domestic Debt Risks in a High-Interest Environment
Although domestic debt is generally considered less risky, during periods of high interest rates, it
can be as dangerous as external debt. This is because high domestic interest rates increase debt
servicing costs, straining the country’s financial resources.

The Role of Debt Tenor in Sustainability

The tenor—or maturity—of debt plays a critical role in debt sustainability. Short-term debt often
comes with lower interest rates because lenders face less risk over a shorter timeframe. However,
the need for frequent refinancing makes short-term debt vulnerable to rising interest rates, which
can increase debt servicing costs and strain a government’s finances. In contrast, long-term debt
provides more stability, as it locks in interest rates over an extended period, mitigating the risk of
future interest rate hikes.
1. Pakistan’s Long-Term Borrowing Strategy
Successive governments in Pakistan have traditionally preferred long-term borrowing over short-
term loans. Over the past three fiscal years, even during times of heightened default risk, the
share of long-term debt in total debt has remained above 80%. This preference for long-term
borrowing demonstrates investor confidence in Pakistan’s ability to repay its obligations and
reduces the need for frequent refinancing, which could expose the country to volatile interest
rates.
2. Short-Term Borrowing Missed Opportunities
Despite this success in securing long-term loans, Pakistan’s debt management strategy could
have benefitted from a greater emphasis on short-term debt in recent years of high interest rates.
Short-term borrowing would have allowed Pakistan to capitalize on potential future interest rate
reductions, lowering its overall cost of borrowing. However, by locking in long-term debt at high
rates, Pakistan now faces elevated debt servicing costs even if interest rates decline in the coming
years.

The Political Economy of Debt Management

1. Pakistan's Commitment to Avoid Default
Despite ongoing debt sustainability challenges, Pakistan has never officially defaulted on its
obligations. This can be attributed to a strong commitment to fiscal discipline through austerity
measures, tax reforms, and controls on public expenditure. Additionally, Pakistan has leveraged
its bilateral relationships and engagement with international financial institutions like the IMF,
World Bank, and the Asian Development Bank (ADB) to secure external support during periods
of financial distress.
 Political Will as a Key Domestic Factor: In the political context of Pakistan, default is
often seen as an unacceptable outcome due to the potential for severe public backlash.
Historically, the ruling class in Pakistan has prioritized avoiding default over other
economic considerations, fearing the political costs more than the economic
consequences. In comparison, countries like Argentina, Venezuela, and Greece, which
have defaulted in recent decades, often did so due to political mismanagement and lack of
fiscal discipline.
2. International Financial Markets and Structural Power
International financial markets play a critical role in influencing sovereign debt repayment
decisions. By determining the availability and cost of credit, these markets limit the economic
policy options available to debtor countries like Pakistan. This structural power is often enforced
through the fear of spillover effects, such as capital flight, higher borrowing costs, and potential
credit embargoes.
 Legal Consequences of Default: In recent years, the consequences of default have
become more severe due to the erosion of sovereign immunity from creditor lawsuits.
Countries like Argentina and the Republic of Congo have faced prolonged legal battles
with creditors, which have disrupted their economies. For example, Argentina fought a
legal case with its creditors for 14 years, while the Republic of Congo’s oil exports were
blocked by lawsuits for several years.

The Path Forward: Strengthening Debt Sustainability

Given the projected rise in debt servicing costs in the coming years, Pakistan must adopt a
multifaceted approach to strengthen its debt sustainability.
1. Provincial Role in Revenue Generation
The provinces must play a more proactive role in revenue generation and human capital
development. This would help reduce the fiscal burden on the federal government and ensure a
more sustainable path for debt management.
2. Rationalizing Expenditures
The federal government must continue efforts to rationalize expenditures, particularly in non-
productive areas, to free up resources for debt repayment. Public sector reforms, targeting
efficiency and waste reduction, can also play a crucial role in managing fiscal deficits.
3. Retiring Debt Obligations
Both the federal and provincial governments must collaborate to develop a strategic framework
for retiring the nation's debt obligations. This involves striking a balance between securing
external financing and developing domestic sources of revenue to avoid over-reliance on debt.

Conclusion
Pakistan's debt sustainability challenges are multifaceted, rooted in structural economic
weaknesses, political decision-making, and global financial dynamics. Although Pakistan has
thus far avoided default, it cannot afford complacency. By addressing its debt structure,
improving fiscal discipline, and leveraging political will, Pakistan can navigate its way toward a
more sustainable financial future. Key to this will be balancing short-term and long-term debt,
raising domestic savings rates, and enhancing productive investment, all while managing
political pressures and international financial obligations effectively.
Addressing Sovereign Debt and Fiscal Challenges in
Pakistan (August 19, 2024)
Introduction
Pakistan faces significant economic challenges due to its sovereign debt and fiscal
mismanagement. This summary explores the current debt situation, its impacts, and potential
solutions to stabilize the economy and foster sustainable growth.
1. Current Debt Situation and Fiscal Challenges
 Sovereign Debt Overview: Sovereign debt is intended to alleviate crises and fund
development, but excessive borrowing can lead to debt distress, exacerbating the initial
issues. As of 2023, Pakistan's total debt and liabilities-to-GDP ratio is 89.9%, with an
annual deficit exceeding 6.9% of GDP.
 External and Internal Debt: Pakistan's external debt and liabilities account for 42.1% of
GDP, requiring substantial dollar expenditures for repayment. Internal debt, amounting to
approximately 47% of GDP, is primarily owed to local banks, representing over 87% of
the money these banks lend to the government.
 Debt Servicing: In FY 2024-25, debt servicing payments are expected to reach Rs9.8
trillion, nearly equivalent to government revenues. The state plans to procure an
additional Rs5.1 trillion in loans from banks and Rs2.7 trillion from non-bank sources,
exacerbating the fiscal trap and increasing vulnerabilities.
2. Economic Implications of Debt Distress
 Exchange Rate Depreciation: The persistent depreciation of the exchange rate has
increased the cost of imported goods, contributing to a trade deficit of $13.9 billion in
2023-24.
 Inflationary Pressures: Elevated interest rates and a depreciating exchange rate have
intensified inflation, eroding consumer purchasing power. Inflation, compounded by the
cost of natural disasters, has led to a 38% reduction in purchasing power and an
anticipated 40% poverty rate, according to the World Bank.
3. Impact of Natural Disasters
 Climate Change Costs: Recent floods have caused substantial losses, including damage
to homes and assets like livestock and precious metals. The failure to develop effective
flood management strategies post-2010 has compounded these losses.
 Economic and Social Costs: The escalating costs associated with natural disasters,
alongside inflation and fiscal mismanagement, have severely impacted the economy and
individuals' livelihoods.
4. Revenue Generation and Taxation
  Declining Tax Collection: Pakistan's tax collection rate has fallen from 14% of GDP in
the 1980s to 10.5% in 2023. The tax structure is regressive, heavily reliant on indirect
taxes, and only one-third of tax revenues come from income tax.
 Tax Exemptions: The agricultural sector and real estate are minimally taxed, with
significant exemptions granted to influential players. Tax exemptions in energy and
production sectors amounted to approximately $17.4 billion in 2022-23, roughly 6% of
GDP.
 Reform Opportunities: Reforming tax exemptions and broadening the tax base could
increase the tax-to-GDP ratio to 13% in the short term and up to 18% over the long term.
5. Government Spending and Fiscal Management
 Budget Allocations: About 80% of government spending is pre-committed, with
significant portions allocated to salaries, pensions, interest payments, and defense.
Developmental spending accounts for only 2.5% of GDP.
 Subsidies and SOEs: Subsidies for the energy sector totaled Rs1.4 trillion in FY 2024-
25, with over 80% benefiting independent power producers. The government also
manages over 210 state-owned enterprises (SOEs), contributing 44% to GDP but
incurring losses of Rs458 billion. These SOEs accumulate circular debts, adding to fiscal
challenges.
6. Strategic Recommendations for Fiscal Stability
 Revenue and Spending Reforms: To address fiscal issues, Pakistan should implement
the Treasury Single Account system, enact comprehensive tax reforms, and phase out
subsidies. Such measures could result in financial savings exceeding Rs850 billion in the
near term and surpassing Rs1,400 billion over an extended period.
 Privatization and Public-Private Partnerships: Privatizing loss-making SOEs and
engaging in public-private partnerships could enhance operational efficiency and reduce
fiscal deficits.
 Inclusive Governance: Embracing inclusive and equitable fiscal governance measures is
crucial for sustainable growth. Addressing subsidies, pension reforms, and SOE
privatization are essential steps toward achieving financial stability and economic
prosperity.
Conclusion
Pakistan's reliance on sovereign debt has led to severe economic and social challenges. Effective
debt management, revenue generation, and fiscal reforms are critical to overcoming these issues.
By adopting strategic measures and improving governance, Pakistan can work towards economic
stability and growth, avoiding the pitfalls of excessive debt reliance.
Debt Sustainability Challenges in Pakistan: An Analytical
Overview (August 11, 2024)
1. Introduction
Pakistan's public and publicly guaranteed debt has surged to a record Rs74.6 trillion by the end
of June 2024. The Finance Ministry's Debt Sustainability Analysis report for 2025-27 assesses
that any new macroeconomic and fiscal shock could push the debt and financing needs to
unsustainable levels. This summary delves into the key findings and implications of the report,
highlighting the risks and projections for Pakistan's debt sustainability.

2. Current Debt Status

2.1 Total Public Debt
As of June 2024, Pakistan's total public and publicly guaranteed debt stands at Rs74.6 trillion.
The public debt burden increased by Rs8.2 trillion, or 12.3%, during the past fiscal year,
equating to 70.5% of the GDP. This level exceeds the Debt Limitation Act's threshold, which
mandates a debt-to-GDP ratio below 57.5%.
2.2 IMF's Position on Debt Sustainability
Despite the unsustainable debt levels, the International Monetary Fund (IMF) continues to
declare Pakistan's debt sustainable to avoid the need for immediate domestic and foreign debt
restructuring.

3. Debt Sustainability Analysis

3.1 Baseline Scenario
In the baseline scenario, the Finance Ministry projects a downward trajectory for the debt-to-
GDP ratio from FY2025 to FY2027, ranging from 68.5% to 66.4%. This projection assumes
economic growth of 3.6% in FY2025, with inflation averaging 12% before reaching single digits
in FY2026. The exchange rate is expected to stabilize, supported by a favorable current account
balance, and the federal primary balance is projected to improve significantly during FY2025-27.
3.2 Shock Scenario
In a combined macro-fiscal shock scenario, the debt-to-GDP ratio could exceed the 70%
threshold, risking debt sustainability. A macro-fiscal shock could push the ratio to 75%, which is
8.6% above the baseline scenario. The total financing requirements would then range around
22.6% of the GDP, 3.2% higher than the baseline assumption.

4. Risk Factors
4.1 External Shocks and Structural Vulnerabilities
The debt profile faces significant risks from external shocks and structural vulnerabilities,
particularly due to a high proportion of external and floating-rate domestic debt. Lower-than-
expected economic growth, a rise in the primary deficit, increased real interest rates, a surge in
contingent liabilities, and exchange rate depreciation could significantly elevate public debt and
gross financing needs.
4.2 External Debt Composition
Pakistan's external debt is mainly from concessional bilateral and multilateral sources, with
fixed-rate debt accounting for 63% and floating-rate debt 37%. The maturity structure is
expected to extend over the three-year horizon, but the growing share of short-term debt poses
refinancing risks, further increasing gross financing needs.
4.3 Domestic Debt Composition
By the end of June, domestic debt constituted 66.2% of the total public debt. Although largely
long-term, the significant share of floating-rate debt (74%) within domestic debt poses interest
rate risks. Fixed-rate debt accounts for only 26% of the total domestic debt.

5. Economic Context and Projections

5.1 Baseline Economic Assumptions
The Finance Ministry assumes the economy will grow by 3.6% in FY2025, with inflation
averaging 12%. The exchange rate is projected to remain stable over the medium term, and the
federal primary balance is expected to improve significantly during FY2025-27.
5.2 Adverse Economic Scenarios
If economic growth remains at 2.6% this fiscal year, the debt-to-GDP ratio will surpass the 70%
benchmark, reaching 70.6% by fiscal year 2027. An adverse GDP growth shock would keep the
debt-to-GDP ratio at 70% or higher over the medium term. The large share of floating-rate debt
within domestic debt also makes it vulnerable to nominal interest rate shocks.

6. Exchange Rate and External Debt Risks

The high share of external debt poses additional risks through exchange rate depreciation.
Although Pakistan's capacity to repay its external debt remains adequate, it is subject to risks
from inadequate export receipts, rising imports, and a deteriorating current account balance,
which could exert pressure on the exchange rate.

7. Conclusion
Pakistan's debt sustainability is precarious, heavily influenced by both internal and external
factors. The Finance Ministry's report underscores the importance of structural reforms and
economic stabilization efforts to manage the country's debt burden effectively. Addressing these
challenges is crucial to ensuring long-term economic stability and growth.

Navigating Pakistan's Debt Crisis: Challenges and Strategic

Imperatives (August 5, 2024)
Introduction
Pakistan's Finance Minister Muhammad Aurungzeb recently disclosed the nation's efforts to seek
debt relief from major bilateral lenders, including China, Saudi Arabia, and the UAE, in an
attempt to secure a crucial loan deal with the IMF. This summary provides an in-depth look at
Pakistan’s current financial predicament, the strategic considerations in seeking external support,
and the broader implications for its economic and foreign policy.
Current Debt Negotiations
 Debt Relief Efforts: Pakistan is negotiating debt rescheduling for $12 billion in loans
from China ($4 billion), Saudi Arabia ($5 billion), and the UAE ($3 billion) to extend
repayment periods and address immediate financing needs.
 Ongoing Discussions: The Finance Minister described recent talks with China as "very
constructive," though specific commitments were not disclosed. The IMF board meeting
on the bailout package is imminent, with external financing confirmation from bilateral
partners required beforehand.
 Government Communications: Prime Minister Shehbaz Sharif has written to the
Chinese government requesting debt reprofiling, emphasizing the urgency of external
support for Pakistan’s financial stability.
Strategic Considerations in Debt Relief
 Discreet Diplomacy: Seeking debt relief should be conducted discreetly to avoid placing
friendly bilateral lenders in awkward positions, particularly those with extensive loan
portfolios in the Global South. Public disclosure during ongoing negotiations may
complicate diplomatic relations.
 Economic Plan Deficiencies: While external support is necessary, it is insufficient for
long-term economic stability. The government lacks a comprehensive economic plan,
relying instead on meeting IMF conditions and securing bilateral debt rescheduling.
Structural Economic Challenges
 Macroeconomic Weaknesses: Pakistan's economic fragility stems from persistent
structural issues, including anaemic growth, high deficits, heavy borrowing, and soaring
inflation. Addressing these problems is essential to breaking the cycle of financial crises
and dependency on external bailouts.
 Need for Structural Reforms: Sustainable economic recovery requires wide-ranging
structural reforms to promote investment, business confidence, and economic growth.
Without these efforts, Pakistan will continue to face recurrent financial crises and donor
fatigue.
Perceptions and Realities of External Dependency
 Reform Imperative: Demonstrating commitment to major reforms can enhance
Pakistan's credibility and willingness of bilateral lenders to provide financial support.
 Conversely, a perceived lack of self-help efforts may deter even the most friendly nations
from extending aid.
 Government’s Track Record: Prime Minister Shehbaz Sharif’s public statements about
ending the era of begging for money contrast with the reality of ongoing dependency on
external funds. The primary focus of foreign policy has become securing financial aid,
overshadowing other strategic objectives.
Implications for Foreign Policy
 Shift in Foreign Policy Focus: The emphasis on securing funds has led to a foreign
policy predominantly driven by financial needs, with less attention given to broader
strategic interests. This approach risks reducing Pakistan to a supplicant in its key
bilateral relationships.
 Need for Policy Review: A comprehensive review of foreign policy in light of changing
global dynamics is crucial. This should involve civilian and military coordination to
ensure cohesive and effective diplomatic strategies that align with national interests.
Conclusion
Pakistan’s efforts to secure debt relief are a critical but short-term measure to address its
immediate financing needs. However, sustainable economic recovery requires a comprehensive
and well-implemented economic plan that addresses structural weaknesses and promotes long-
term growth. In parallel, a more strategic and balanced foreign policy is essential to navigate the
complex international environment and safeguard national interests. By undertaking these
reforms, Pakistan can break free from its cycle of dependency and build a more resilient and self-
sufficient economy.

Pakistan's Financial Strategy: Reprofiling Debt and

Securing IMF Support (July 28, 2024)
Introduction
Pakistan is undertaking significant measures to address its financial challenges, including the
reprofiling of $27 billion in debt with friendly nations such as China, Saudi Arabia, and the
UAE. These efforts are aimed at securing a 37-month IMF bailout package, easing energy sector
foreign exchange outflows, and stabilizing consumer tariffs. This summary delves into the details
of Pakistan’s debt management strategy, the role of international partnerships, and the
implications for its economic stability.
Debt Reprofiling Efforts
Request to Friendly Nations
Finance Minister Muhammad Aurangzeb announced that Pakistan has sought the re-profiling of
more than $27 billion in debt and liabilities with China, Saudi Arabia, and the UAE. Islamabad
has specifically requested the rollover of its $12 billion annual debt portfolio by three to five
years to secure IMF board approval for a $7 billion economic bailout. This includes extending
the maturity period of loans totaling $5 billion from China, $4 billion from Saudi Arabia, and $3
billion from the UAE to at least three years.
Chinese Support
Pakistan has asked China to convert its imported coal-based projects to local coal and reprofile
over $15 billion in energy sector liabilities. This request aims to create fiscal space amidst
challenges in timely repayments. Following meetings with Chinese officials, China has shown a
willingness to support Pakistan by facilitating new business ventures and reprofiling energy
sector payments. Moreover, China has committed to supporting Pakistan’s case at the IMF board
as a major stakeholder.
IMF Bailout Package
Securing the Package
The reprofiling of debts is part of a broader strategy to secure a 37-month IMF bailout package.
Minister Aurangzeb emphasized the necessity of ensuring confirmation of external financing
from bilateral partners before the IMF board meeting. He stated that the IMF had assessed
Pakistan's financing needs for the next three years, including its $7 billion Extended Fund
Facility, and that the debt rollovers would make the remaining external financing gap
manageable.
No Incremental Financing
Minister Aurangzeb clarified that Pakistan is not seeking incremental financing from friendly
countries. The focus is on extending the maturity period of existing loans rather than securing
additional funds. This approach aims to provide greater predictability under the IMF program
without increasing the debt burden.
Energy Sector Reprofiling
Conversion to Local Coal
A significant aspect of Pakistan's strategy involves converting Chinese power projects from
imported coal to local coal. This move, discussed with Chinese officials, aims to alleviate foreign
exchange pressures and improve fiscal stability. The reprofiling of energy sector debts,
particularly those related to the China-Pakistan Economic Corridor (CPEC), will be addressed on
a project-by-project basis.
Discussions and Agreements
Discussions with Chinese financial institutions and project sponsors are underway, facilitated by
the hiring of local Chinese consultants. The goal is to manage the debt of Chinese independent
power producers (IPPs) and ensure timely payments, focusing on rescheduling foreign exchange
liabilities to create fiscal space.
Economic Stabilization Measures
Structural Solutions
Minister Aurangzeb stressed the importance of long-term structural solutions to Pakistan's
economic challenges. He acknowledged the difficulties faced by various societal segments due to
high interest rates, energy prices, currency devaluation, and increased tax burdens. However, he
emphasized the necessity of tough measures to restore fiscal stability.
Collaboration with International Partners
Pakistan is also working closely with the US and China to advance the second phase of CPEC,
which includes relocating Chinese businesses to Pakistan. Additionally, the US remains
Pakistan's largest trading partner, while the European Union's GSP+ status continues to support
Islamabad's exports.
Capital Market Initiatives
Panda Bonds
During his visit to China, Minister Aurangzeb explored opportunities in the Chinese capital
market through Panda bonds. Pakistan plans to register for the equivalent of $1 billion in Panda
bonds, initially tapping into around $150-200 million. This initiative aims to leverage the world's
second-largest capital market to bolster Pakistan's financial position.
Public Sector Restructuring
Bite-Size Restructuring
Past efforts for public sector rightsizing did not yield significant results due to large portfolios.
To address this, the government is focusing on 'bite-size' restructuring, starting with five
shortlisted ministries: Kashmir Affairs and Gilgit-Baltistan, Safron, Industries and Production, IT
and Telecom, and Health. This approach aims to protect worker rights and asset values while
streamlining operations.
Conclusion
Pakistan's comprehensive strategy to reprofile its debt and secure an IMF bailout package
highlights the government's commitment to stabilizing the economy. By extending loan
maturities, converting energy projects to local coal, and exploring capital market opportunities,
Pakistan aims to create fiscal space and improve economic stability. Collaboration with
international partners and structural reforms are crucial components of this strategy, positioning
Pakistan for a more sustainable financial future.
Pakistan's Request for Debt Rescheduling with China:
Addressing CPEC Power Project Dues (July 26, 2024)
Introduction
Pakistan has formally requested China to reschedule its debts related to the China-Pakistan
Economic Corridor (CPEC) power projects. This request comes in light of the increasing
outstanding dues, which have surged by 44% to Rs401 billion by the end of the last fiscal year.
These unpaid debts, which violate the 2015 CPEC Energy Framework Agreement, are impeding
further financial and commercial relations between the two countries.
High-Level Meetings and Requests for Debt Rescheduling
Finance Minister Senator Muhammad Aurangzeb and Energy Minister Sardar Awais Laghari
met with China's Finance Minister Lan Fo’an and the President of China Export and Credit
Insurance Corp (SINOSURE) to discuss the debt issue. Key points discussed include:
1. Extension and Currency Conversion:
o Pakistan requested an eight-year extension for repaying energy debt and proposed
converting US dollar-based interest payments to the Chinese currency. This move
aims to reduce the financial burden on Pakistan.
2. Interest Rate Reduction:
o The Pakistani officials also requested a reduction in the overall interest rates for
both CPEC and non-CPEC Chinese-funded projects. This measure is seen as
essential for lowering energy costs and securing International Monetary Fund
(IMF) approval for a $7 billion bailout package.
3. Support from SINOSURE:
o The Pakistani delegation expressed confidence that SINOSURE would continue
to support ongoing and new projects under the second phase of CPEC, now led by
the private sector. The outcome of these discussions, however, remains uncertain
as the finance ministry did not confirm any agreements on loan extensions or
interest rate reductions.
Challenges in CPEC Agreements and Outstanding Dues
Pakistan has faced challenges in adhering to the terms of the CPEC agreements, particularly in
making timely payments for power purchased from Chinese plants. This has led to significant
financial implications:
1. Surge in Outstanding Dues:
o By June 2024, Pakistan's outstanding dues to Chinese power plants reached
Rs401 billion, an increase of Rs122 billion or 44% from the previous year. The
 failure of the Power Division to settle at least 90% of the monthly claims from
these projects has exacerbated the situation.
2. Specific Power Project Dues:
o Detailed figures show substantial dues to various projects:
 Sahiwal Power Plant: Rs88.3 billion
 Hub Power Project: Rs69 billion
 Port Qasim Power Plant: Rs70.4 billion
 Thar Coal Project: Rs53 billion
3. Pakistan Energy Revolving Account (PERA):
o To protect Chinese firms from the circular debt crisis, Pakistan was supposed to
create a revolving fund with 21% of the power invoices. Instead, PERA was
established at the State Bank of Pakistan (SBP) in October 2022 with Rs48 billion
in annual allocations, but withdrawals were limited to Rs4 billion per month,
resulting in a Rs400 billion debt.
Reactions and Diplomatic Efforts
The Chinese government has consistently raised concerns about Pakistan's non-compliance with
payment schedules through diplomatic channels, including communications with Pakistan’s
embassy in Beijing and China’s embassy in Islamabad. Additionally, Chinese companies have
expressed opposition to reducing profit margins or renegotiating the 2015 Power Purchase
Agreements.
1. Additional Receivables:
o Other projects have also seen an increase in receivables:
 Engro PowerGen Plant: Rs48.4 billion
 Matiari-Lahore Transmission Line Project: Rs22 billion
 Karot Power Project: Nearly Rs13 billion
2. Smaller Project Payables:
o Smaller projects, such as Thar Coal Energy Limited (Rs8.5 billion), ThalNova
(over Rs5 billion), and UEP Power Plant (less than Rs3 billion), also have
significant payables.
Economic Reforms and Future Prospects
During the meetings, Finance Minister Muhammad Aurangzeb emphasized the importance of
China-Pakistan financial and banking cooperation, expressing gratitude for China’s support. He
briefed the Chinese side on Pakistan’s economic reform agenda, which includes:
  Tax Revenue Generation: Efforts to increase government revenue through improved tax
collection.
 Energy Sector Reforms: Initiatives aimed at reducing energy costs and enhancing
efficiency.
 State-Owned Enterprise Reforms: Measures to improve the performance and
management of state-owned enterprises.
The recent IMF agreement was highlighted as a crucial element enabling the execution of these
reforms.
Energy Minister Sardar Awais Laghari outlined ongoing energy sector reforms and reiterated the
government’s commitment to addressing operational and organisational challenges. The success
of these reforms is critical for stabilizing Pakistan’s economy and ensuring sustainable growth.
Conclusion
Pakistan’s request for debt rescheduling with China reflects the urgent need to address financial
challenges related to CPEC power projects. The surge in outstanding dues and the associated
strain on Pakistan’s economy underscore the importance of finding a viable solution. The
outcome of the discussions with Chinese officials will significantly impact Pakistan’s economic
relations with China and its overall financial stability. The successful renegotiation of terms and
continued cooperation under the CPEC framework will be crucial for both countries' mutual
benefit.

The Debt Crisis in Pakistan: Analysis and Implications (July

24, 2024)
Introduction
Earlier this month, Pakistan secured a staff-level agreement with the International Monetary
Fund (IMF) for a record 24th time. However, the absence of any mention of debt sustainability in
the IMF's accompanying press release is both surprising and disappointing. This omission comes
despite a recent IMF report highlighting the precarious nature of Pakistan's debt situation, with a
narrow path to debt sustainability amid significant risks. This summary explores Pakistan's debt
dynamics, implications of the IMF agreement, and the potential socioeconomic fallout of the
current approach.

Current Debt Situation

1. Debt-to-GDP Ratio and Fiscal Consolidation
The end-FY24 debt-to-GDP ratio is projected to decrease significantly due to fiscal consolidation
and ex-post negative real interest rates. However, the risks to debt sustainability remain acute
due to large gross financing needs and persistent challenges in obtaining external financing. Real
interest rates are projected to become an adverse driver of debt dynamics in the coming years.
 2. Gross Financing Needs
According to the IMF, for the next five years, Pakistan needs to repay an average of $19 billion
annually in principal repayments, which is more than half of its export revenues. Additionally,
the country requires at least $6 billion annually to finance minimal current account deficits,
bringing total external financing needs to at least $25 billion per year until 2029. However,
Pakistan's foreign exchange reserves are less than $9.5 billion.
3. Interest Payments
The government needs to pay an average of 6.5% of GDP in interest on the existing debt over the
next five years. With a total tax take of barely 10% of GDP, the interest payments consume a
substantial portion of government revenue, leaving limited resources for other critical spending.
4. Debt Accumulation
At 77% of GDP, Pakistan's public debt is already above the levels considered excessive for an
emerging market. Further debt accumulation is dangerous, and with gross financing needs at
24% of GDP, borrowing at reasonable costs will be challenging.

Economic and Social Implications

1. Austerity Measures and Social Impact
The imposition of severe austerity measures could have tragic consequences. The population,
already suffering from stagnant per capita income, a historic cost of living crisis, and political
instability, may face unbearable hardships. As seen in Kenya, such measures could trigger
significant social unrest in Pakistan, the world's fifth-largest country.
2. Interest Burden and Social Spending
Pakistan's government pays more on interest as a share of the economy than any other
developing country, with the interest payments to government revenue ratio being the second
highest in the world. This heavy burden crowds out essential social spending, critical for
improving education, health, and economic opportunities. Pakistan spends almost three times
more on interest than on education and six times more on health, leading to poor social
outcomes, such as high child stunting rates and a significant number of out-of-school children.
3. Investment and Growth
Large debt repayment obligations also limit the government's ability to invest in the country's
future. Pakistan invests only 12% of GDP, far below the level necessary for sustained growth.
This low investment level hampers the development of infrastructure and other vital areas
needed to spur economic growth.

Debt Sustainability Analysis

1. IMF's Debt Sustainability Analysis (DSA)
According to the latest IMF DSA, Pakistan needs to run a primary surplus and maintain it for
years to come for its debt to be sustainable. However, this scenario seems unlikely given the
country's historical performance and current economic challenges. The IMF's forecasts of
Pakistan's public debt and key variables like the primary deficit, real interest rates, growth, and
exchange rates have historically been overly optimistic.
2. The Need for Debt Restructuring
Given the dire situation, there is a strong case for debt restructuring. The IMF's own research
indicates that fiscal consolidations fail to make debt more sustainable by undermining growth,
especially in weak global environments. In cases of severe distress, such as Pakistan's,
combining fiscal consolidation with debt restructuring is necessary. Reprofiling Pakistan's public
debt would free up resources for crucial spending on development and climate resilience.

Comparative Analysis
The provided graphs highlight Pakistan's debt situation compared to other developing countries.
 Public Debt Creating Flows (Percent of GDP): The first graph illustrates the
components contributing to public debt in the past five years and projections for the next
five years. It shows a significant primary deficit, real interest rate impact, and exchange
rate depreciation affecting debt levels. The projected change in public sector debt
suggests a challenging outlook.
 Gross Financing Needs (2024, % of GDP): The second graph shows that Pakistan's
gross financing needs are second only to Egypt among emerging markets. This high level
of financing needs underscores the difficulty Pakistan faces in managing its debt without
substantial external assistance or restructuring.

Conclusion
Pakistan's current debt situation is unsustainable without significant intervention. The IMF's
agreement and the government's approach of "extend and pretend" may provide temporary relief
but do not address the underlying issues. Without debt relief and restructuring, Pakistan will face
severe socioeconomic consequences, including potential social unrest, stunted growth, and
worsening poverty and inequality. A more prudent approach would involve truth-telling and a
combination of fiscal consolidation with debt restructuring to create a sustainable path forward
for Pakistan.

The Burden of Financial Colonialism: Pakistan, the IMF,

and Economic Self-Determination
Introduction
Since its initial engagement with the International Monetary Fund (IMF) in 1958, Pakistan has
sought the organization's assistance 22 times. The most recent negotiations occurred amid
recovery efforts from devastating floods. Without IMF support, Pakistan risked recession,
weakened long-term growth, and fleeing foreign investors. This would complicate future
borrowing and possibly lead to government instability, as seen in Sri Lanka. The IMF often
portrays itself as a savior, but its stringent conditions can exacerbate inequality and hinder
countries' ability to care for their citizens, trapping them in a cycle of debt.

Historical Context and Critique of the IMF

IMF’s Role and Policies: The IMF was established alongside the World Bank at the Bretton
Woods Conference in 1944 to assist war-torn economies and stabilize the global financial
system. While the World Bank provides long-term development loans, the IMF addresses short-
term balance-of-payment problems. However, IMF assistance comes with stringent
conditionalities, including austerity measures, trade liberalization, privatization, and tax law
reforms. These conditions often lead to economic instability and social unrest in recipient
countries.
Impact on Developing Countries: The IMF's austerity measures can lead to severe economic
and social consequences. For instance, during the Asian financial crisis in the 1990s, countries
like South Korea, Thailand, and Indonesia faced extensive conditionalities, leading to economic
downturns and social upheavals. The IMF's policies have been criticized for creating inequality,
social injustice, and ethnic tensions, as seen in Indonesia during the crisis. Despite
acknowledging mismanagement, the IMF continues to impose similar measures, adversely
affecting developing countries' ability to fulfill their citizens' rights.

The Right to Economic Self-Determination

Legal Foundations: The right to self-determination, enshrined in the United Nations Charter
and other international covenants, encompasses both political and economic dimensions. The
International Covenant on Civil and Political Rights and the International Covenant on
Economic, Social, and Cultural Rights affirm that all peoples have the right to freely determine
their political status and pursue their economic, social, and cultural development. This right
implies that states should control their own resources and use them for their own development.
Economic Independence and Sovereignty: Economic self-determination ensures that a state's
resources are used to fulfill its citizens' needs rather than servicing debt to richer nations.
Without economic independence, political sovereignty is undermined, leading to a "hollow
sovereignty." The principle of self-determination, recognized as customary international law by
the International Court of Justice (ICJ), entails that a people must have control over their
economic planning and resources. The lack of economic self-determination impedes the
realization of basic human rights, such as education, healthcare, and housing.

Pakistan’s Struggle with IMF Dependency

Historical Dependency: Pakistan’s repeated engagement with the IMF over the past decades
highlights its dependency on external financial assistance. Since 1958, Pakistan has sought IMF
bailouts 22 times, significantly impacting its economic policies and state capacity. Nadeem
Haque describes Pakistan as an "IMF addict," noting that the country has spent 22 out of the past
30 years under IMF programs. These programs have often resulted in draconian spending cuts
and arbitrary taxes, weakening the economy and state capacity.
Economic and Social Impact: The IMF's conditionalities have exacerbated Pakistan's economic
challenges. The country's economy faces severe distress due to the COVID-19 pandemic and the
Russian invasion of Ukraine, which have increased inflationary pressures. High US interest rates
have also led to foreign investment withdrawal from riskier markets. In 2022, Pakistan spent 52
out of every 100 rupees on debt servicing, limiting its ability to fund essential services. This
situation has led to brain drain and increased poverty, further undermining Pakistan's economic
self-determination.

The Need for a New International Economic Order

Historical Efforts and Failures: In 1974, developing countries spearheaded a UN General
Assembly resolution for a New International Economic Order (NEIO), aiming to redirect
resources from rich to poor states and curtail the power of institutions like the IMF and World
Bank. However, the NEIO initiative was sabotaged by Western powers, particularly the US,
which leveraged aid packages and accused Global South countries of human rights violations to
break the coalition.
Call for Change: The current global financial system perpetuates cycles of debt and
dependency, severely limiting the economic self-determination of developing countries. The
IMF's conditionalities infringe on this right, preventing countries like Pakistan from using their
resources for their own development. There is a pressing need for a new international economic
order that respects the economic sovereignty of states and allows them to prioritize their citizens'
welfare over debt repayment.

Conclusion
Pakistan's repeated reliance on the IMF underscores the detrimental impact of financial
colonialism on economic self-determination. The IMF’s stringent conditionalities have
exacerbated economic instability, social unrest, and inequality in developing countries. To ensure
true self-determination, the global community must advocate for a new international economic
order that empowers countries in the Global South to control their resources and prioritize their
people's needs. Such an order would promote genuine economic independence and social justice,
breaking the cycle of debt and dependency.

The Story of Pakistan's Economy and Foreign Aid

Dependency (PIDE)
Introduction
The economic narrative of Pakistan cannot be fully understood without addressing the significant
role of foreign aid. From the nation's inception, foreign aid was initially a necessity due to
adverse socio-economic conditions. However, over time, it transformed into an unhealthy
dependency on external capital. This summary explores the multifaceted implications of foreign
aid on Pakistan’s economy, including the effectiveness of aid, dependency issues, corruption,
and the impact on development indicators.
Historical Context and Foreign Aid Inflows
Pakistan has received approximately USD 203 billion in external finance throughout its history,
primarily through loans and grants. The inflow of external finance can be observed in the graph
depicting total dollar inflows from FY 1951-52 to FY 2021-22. The data indicates fluctuating
inflows with significant peaks, especially in the early years and recent decades.

Project Implementation and Debt Repayment

Over the past decade, Pakistan has had an average of 1,268 donor-funded projects operational
annually. Despite this substantial number, there is a lack of detailed information regarding these
projects, including signed agreements and contracts. Pakistan has repaid approximately USD 135
billion in interest and principal charges on its debt. Notably, around 78% of the assistance
received has been in the form of loans. The lack of transparency extends to the organizations
executing these projects and the associated consultancy and administrative charges.

Effectiveness of Foreign Aid

Effective aid should meet several criteria, such as:
 Transfer of resources without creating long-term liabilities
 Not being source-tied to the creditor country
 Sustainable and self-sustaining development
 Increased marginal savings rate leading to higher capital formation
 Facilitation of additional capital complemented by development programs
 Triggering sustainable economic growth through capital formation
However, evidence suggests that Pakistan's foreign aid rarely meets these criteria, becoming a
monetary and non-monetary burden.

Dependency Syndrome and Foreign Aid in Development Programs

The dependency on foreign aid is evident in Pakistan's Public Sector Development Program
(PSDP), where foreign aid constitutes a significant portion of federal development financing.
This dependency violates the criteria for effective aid by not promoting additional capital
formation or increased savings rates. Additionally, less than half of foreign commitments
materialize, leading to delays and ‘throw-forward’ costs, which now stand at Rs. 8 trillion.

Corruption and Mismanagement

The pursuit of foreign aid has been marred by waste, corruption, and rent-seeking. High-ranking
officials often negotiate foreign debt, leading to personal gains through foreign tours, project
allowances, and post-retirement positions in major donor institutions. This mismanagement
increases Pakistan’s liabilities, including commitment charges on unnecessary loans.
External Debt and Servicing
The graphs on external debt and external debt servicing highlight that despite substantial aid
inflows, Pakistan's capital accumulation and savings have remained low. This has forced the
country to contract more external debt, increasing present and future liabilities. The net resource
transfer graph shows an estimated USD 50 billion flowing out of Pakistan to external creditors in
the 21st century, indicating unsustainable economic practices.

Human Development Indicators

Despite substantial aid inflows, Pakistan’s development indicators, such as the Human
Development Index (HDI), have shown minimal improvement. The disaggregated HDI table
illustrates that while there have been some gains in certain regions, the overall progress has been
slow and insufficient.

Conclusion
In summary, Pakistan's dependency on foreign aid has resulted in significant financial inflows
but minimal true development. This dependency has created substantial future liabilities,
corruption, and ineffective project implementation. The lack of substantial improvement in
development indicators calls for a serious reevaluation of foreign aid policies in Pakistan.
Effective aid should promote sustainable development, increased savings rates, and capital
formation without creating long-term liabilities.

Recommendations for Future Policy

1. Transparency and Accountability: Enhance transparency in foreign aid agreements and
project implementation to ensure funds are used effectively and efficiently.
2. Effective Aid Utilization: Focus on aid that promotes sustainable development,
increased savings rates, and capital formation without creating long-term liabilities.
3. Reduce Dependency: Develop strategies to reduce dependency on foreign aid by
improving domestic revenue generation and capital formation.
4. Anti-Corruption Measures: Implement strict anti-corruption measures to prevent
misuse of foreign aid and ensure that projects are executed as intended.
5. Regional Development: Prioritize development in lagging regions to ensure balanced
growth and improve overall HDI scores.

Conclusion
The extensive inflow of foreign aid into Pakistan has not translated into sustainable development.
The dependency on external capital has led to increased liabilities, corruption, and ineffective
project outcomes. A comprehensive reevaluation of foreign aid policies and a focus on
sustainable development practices are essential for Pakistan to achieve long-term economic
growth and development.
 Public Debt Scenario
A Brief Overview in FY 2023-24:

Objective of Public Debt Management

The primary objective of public debt management is to ensure that the government's gross
financing requirements are met at the lowest possible cost over the medium to long run,
consistent with a prudent degree of risk. This involves managing public debt in a way that
ensures both the level and rate of growth in public debt are fundamentally sustainable. The debt
portfolio must be efficiently structured in terms of currency composition, maturity profile, and
interest rates, while maintaining prudent levels of contingent liabilities.

Variability in Public Debt Management

The conduct of public debt management varies across sovereigns due to different institutional
setups, macro-dynamics, economic fundamentals, legal frameworks, and governance structures.
Each country's approach is tailored to its unique economic and institutional context.

Developments in Public Debt Portfolio and Borrowing Operations

(July-March FY 2024)
Domestic vs. External Financing
 Approximately 88% of the fiscal deficit financing was sourced from domestic markets.
 12% of the financing was obtained from external sources.
Domestic Debt Management
 The government primarily relied on long-term domestic debt securities to finance its
fiscal deficit and repay debt maturities.
o Key instruments included floating rate Pakistan Investment Bonds (PIBs) and
Sukuk.
 The government managed to retire Treasury Bills (T-bills) amounting to Rs 0.8 trillion,
which led to a reduction in short-term maturities.
Regulatory Amendments and Innovations
 To enhance competitiveness, transparency in borrowing operations, and diversify the
investor base, the government amended the Treasury Bills Rules, 1998, and Ijara Sukuk
Rules, 2008.
  Following these amendments, the government conducted the maiden auction of a 1-year
fixed rate Ijara Sukuk on the Pakistan Stock Exchange (PSX) in December 2023, shifting
the entire Sukuk auction system to PSX.
 Additionally, a 1-year discounted Sukuk instrument was introduced, aiming to diversify
the Shariah-compliant instrument base and offer more options to investors inclined
towards Islamic investments.
 The government successfully issued Shariah Compliant Sukuk instruments amounting to
approximately Rs 1.5 trillion.

External Budgetary Disbursements

 Total external budgetary disbursements amounted to US$ 6.3 billion.
o Of this, US$ 2.7 billion was received from multilateral sources.
o US$ 2.8 billion was provided by bilateral development partners.
o US$ 0.8 billion was recorded as inflow from Naya Pakistan Certificates.
 Additionally, the government received:
o US$ 1.2 billion under the IMF’s Stand-By Arrangement (SBA).
o US$ 1.0 billion bilateral deposit from the UAE for balance of payment support.

Conclusion
The developments in public debt management and borrowing operations during the first nine
months of FY 2024 highlight a strategic shift towards long-term domestic debt securities and
enhanced regulatory frameworks to ensure sustainability and efficiency in debt management. The
government's efforts to diversify its debt instruments and improve transparency have bolstered
its ability to meet fiscal requirements while managing risks prudently.

Analysis of Pakistan's Public Debt Trends and Fiscal

Responsibility

Overview
The Fiscal Responsibility and Debt Limitation (FRDL) Act 2005 of Pakistan defines “Total
Public Debt” as the debt owed by the Government, which includes both the Federal and
Provincial Governments. This debt is serviced out of the consolidated fund and includes debts
owed to the International Monetary Fund (IMF). The analysis presented here provides a
comprehensive overview of the trends in Pakistan's public debt, the factors influencing its
growth, and its implications on the country's economy. The data spans from 1971 to March 2024,
detailing both domestic and external debts and their proportions relative to GDP.

Trends in Total Public Debt

Table 9.1: Total Public Debt (June 2018 - March 2024)
 Domestic Debt:
o June 2018: Rs 16,416 billion
o March 2024: Rs 43,432 billion
o Proportion of GDP: Increased from 41.9% (June 2018) to 46.2% (June 2023)
 External Debt:
o June 2018: Rs 8,537 billion
o March 2024: Rs 24,093 billion
o Proportion of GDP: Increased from 21.8% (June 2018) to 28.6% (June 2023)
 Total Public Debt:
o June 2018: Rs 24,953 billion
o March 2024: Rs 67,525 billion
o Proportion of GDP: Increased from 63.7% (June 2018) to 74.8% (June 2023)
 Total Debt of the Government:
o June 2018: Rs 23,024 billion
o March 2024: Rs 61,574 billion
o Proportion of GDP: Increased from 41.9% (June 2018) to 68.7% (June 2023)

Factors Influencing Public Debt Growth

Table 9.2: Increase in Total Public Debt (Jul-Mar FY23 vs. Jul-Mar FY24)
 Total Increase:
o FY23: Rs 10,005 billion
o FY24: Rs 4,644 billion
 Components:
o Federal Primary Deficit/Surplus:
  FY23: Rs -48 billion (Surplus)
 FY24: Rs -1,180 billion (Deficit)
o Interest on Debt:
 FY23: Rs 3,582 billion
 FY24: Rs 5,518 billion
o Other (Exchange Rate/Cash Balances/Accounting Impact):
 FY23: Rs 6,470 billion
 FY24: Rs 306 billion
The significant reduction in the growth of public debt during the first nine months of FY24 (a
54% reduction compared to FY23) is attributed primarily to exchange rate stability.

Long-Term Trends in Public Debt

Table 9.3: Trend in Total Public Debt (1971 - 2024)
 1971:
o Domestic Debt: Rs 14 billion
o External Debt: Rs 16 billion
o Total Public Debt: Rs 30 billion
 1980:
o Domestic Debt: Rs 64 billion
o External Debt: Rs 122 billion
o Total Public Debt: Rs 186 billion
 2000:
o Domestic Debt: Rs 1,645 billion
o External Debt: Rs 1,527 billion
o Total Public Debt: Rs 3,172 billion
 2024 (March):
o Domestic Debt: Rs 43,432 billion
o External Debt: Rs 24,093 billion
 o Total Public Debt: Rs 67,525 billion
This historical data illustrates a continuous increase in both domestic and external debt over the
decades, reflecting the growing financial obligations of the government.

Debt as a Percentage of GDP

 June 2018 - June 2023:
o The proportion of domestic debt relative to GDP has fluctuated but showed a
general upward trend, reaching 46.7% in June 2022 and slightly decreasing to
46.2% in June 2023.
o External debt as a percentage of GDP increased from 21.8% in June 2018 to
28.6% in June 2023.
o Total public debt as a percentage of GDP rose from 63.7% in June 2018 to 74.8%
in June 2023.

Conclusion
The analysis of Pakistan's public debt from 1971 to 2024 reveals a significant increase in both
domestic and external debt, with substantial growth in the last decade. The Fiscal Responsibility
and Debt Limitation (FRDL) Act 2005 provides a framework for understanding the composition
and servicing of this debt. The marked reduction in the growth of public debt during FY24 can
be attributed to exchange rate stability, although challenges such as increasing interest
obligations and a federal primary deficit persist. The historical data underscores the critical need
for sustainable fiscal policies to manage and mitigate the rising debt levels effectively.

Medium-Term Debt Management Strategy (FY 2023 – FY

2026) and Public Debt Servicing in Pakistan

Overview
The Ministry of Finance of Pakistan has updated its Medium-Term Debt Management Strategy
(MTDS) for the period FY 2023 to FY 2026. This strategy takes into account the country's
medium-term macro fiscal framework and aims to manage risks associated with the public debt
portfolio effectively. The analysis below provides a comprehensive overview of the key debt risk
indicators and the servicing of public debt, based on data up to December 2023.
Key Debt Risk Indicators
Table 9.4: Debt Risk Indicators (End Dec-2022 vs. End Dec-2023)
1. Currency Risk:
o Share of External Debt in Total Public Debt:
 End Dec-2022: 37.1%
 End Dec-2023: 36.7%
o The slight reduction in the share of external debt indicates a marginal shift
towards managing currency risk by potentially increasing reliance on domestic
debt.
2. Refinancing Risk:
o Average Time to Maturity (ATM):
 Domestic Debt:
 End Dec-2022: 3.5 years
 End Dec-2023: 3.0 years
 External Debt:
 End Dec-2022: 6.3 years
 End Dec-2023: 6.3 years
o The decrease in the ATM of domestic debt from 3.5 to 3.0 years highlights a
rising refinancing risk, suggesting that domestic debt will need to be rolled over
more frequently.
3. Share of Shariah-Compliant Instruments in Government Securities:
o End Dec-2022: 9.2%
o End Dec-2023: 11.5%
o The increase in the share of Shariah-compliant instruments signifies a
diversification of funding sources in compliance with Islamic finance principles.
4. Share of Fixed Rate Debt in Government Securities:
o End Dec-2022: 22.6%
o End Dec-2023: 19.0%
o The decline in the share of fixed-rate debt from 22.6% to 19.0% suggests a greater
reliance on floating rate instruments, which can lead to higher interest costs if
market rates rise.
Servicing of Public Debt
Interest Expense (IE) during FY 2024
Interest expenses for the first nine months of FY 2024 amounted to Rs 5,517 billion, against an
annual budget estimate of Rs 7,302 billion. This substantial expense underscores the significant
cost burden of servicing public debt.
Breakdown of Interest Expenses:
1. Domestic Debt:
o Interest Expense: Rs 4,807 billion
o Comparison to Previous Year: 55% increase
o The main drivers of this increase include:
 High borrowing costs on new domestic debt.
 Resetting of existing floating rate debt at higher rates, influenced by
elevated policy rates (approximately 74% of domestic debt is at floating
rates).
2. External Debt:
o Interest Expense: Rs 710 billion
o Despite being lower than domestic interest expenses, the servicing cost of external
debt remains a critical factor in the overall debt strategy.
Table 9.5: Interest Expense FY 2024:
 External Debt IE:
o Budgeted: Rs 872 billion
o Actual (Jul-Mar): Rs 710 billion
o Percentage of Budgeted: 81%
o Percentage of Revenue: 7%
o Percentage of Current Expenditure: 6%
 Domestic Debt IE:
o Budgeted: Rs 6,430 billion
o Actual (Jul-Mar): Rs 4,807 billion
o Percentage of Budgeted: 75%
 o Percentage of Revenue: 49%
o Percentage of Current Expenditure: 39%
 Total Debt IE:
o Budgeted: Rs 7,302 billion
o Actual (Jul-Mar): Rs 5,517 billion
o Percentage of Budgeted: 76%
o Percentage of Revenue: 56%
o Percentage of Current Expenditure: 45%
The interest expense represents a significant portion of the government’s revenue and current
expenditures, underscoring the challenge of managing public debt sustainably.

Conclusion
The Medium-Term Debt Management Strategy (MTDS) for FY 2023 – FY 2026 provides a
framework for managing Pakistan's public debt by focusing on key risk indicators such as
currency risk, refinancing risk, and the composition of government securities. The data from the
first nine months of FY 2024 highlights the substantial burden of interest expenses, particularly
on domestic debt, driven by high borrowing costs and the prevalence of floating rate instruments.
Moving forward, effective management of these risks and a focus on sustainable borrowing
practices will be crucial to maintaining fiscal stability.

Analyzing Pakistan's Domestic Debt Composition and

Developments (FY 2024)

Overview
Domestic debt in Pakistan is categorized into three primary types: permanent debt, floating debt,
and unfunded debt. Each type has distinct characteristics and instruments that the government
uses to manage and raise funds. This summary provides a detailed examination of these
categories, the instruments involved, and the significant changes in the domestic debt portfolio
during the first nine months of FY 2024.

Categories of Domestic Debt

1. Permanent Debt
o Characteristics: Medium to long-term debt instruments.
 o Instruments:
 Pakistan Investment Bonds (PIBs): Longer-term securities with
maturities exceeding 12 months. They can be fixed-rate or floating-rate,
paying profits at regular intervals until maturity.
 Fixed-rate PIBs: Pay a fixed profit amount.
 Floating-rate PIBs: Pay a variable profit amount based on
reference rates like 3- or 6-month T-bills yield.
 Government Ijara Sukuk (GIS): Shariah-compliant securities issued
since 2008-09, including 3-year, 5-year, and a recently introduced 1-year
discounted Sukuk.
 Prize Bonds: Non-interest-bearing instruments used for medium to long-
term debt.
o Current Status: Permanent debt constituted 72% of the domestic debt portfolio,
recorded at Rs 31.2 trillion by end-March 2024, showing an increase of Rs 5.7
trillion in the first nine months of the fiscal year. The net mobilization through
PIBs and GIS was Rs 4.2 trillion and Rs 1.5 trillion, respectively.
2. Floating Debt
o Characteristics: Short-term debt instruments.
o Instruments:
 Treasury Bills (T-bills): Short-term securities with maturities of 12
months or less.
o Current Status: Floating debt was Rs 8.5 trillion, about 20% of the total
domestic debt portfolio by end-March 2024. There was a reduction of Rs 0.8
trillion in T-bills during the first nine months of FY 2024.
3. Unfunded Debt
o Characteristics: Primarily made up of instruments under the National Savings
Schemes.
o Current Status: Unfunded debt stood at Rs 2.8 trillion, accounting for 6% of the
total domestic debt portfolio by end-March 2024. It saw a net reduction of Rs 135
billion during the first nine months of FY 2024.
4. Other Components of Domestic Debt
o Naya Pakistan Certificates: Rs 94 billion (held by residents only).
o SBP on-lending to Federal Government against IMF Special Drawing Rights
(SDRs): Rs 475 billion.
 o Loans from banks (foreign currency denominated): Rs 361 billion.

Government Securities Instruments

Types of Marketable Securities:
 Treasury Bills (T-bills): Short-term with maturities of 12 months or less.
 Pakistan Investment Bonds (PIBs): Long-term with maturities more than 12 months,
divided into fixed-rate and floating-rate PIBs.
 Government Ijara Sukuk (GIS): Shariah-compliant securities issued to diversify the
investor base towards Islamic investments.
Table 9.6: Government Securities Instruments:
 Lists all the types of instruments used by the government to raise debt, including T-bills,
PIBs, and GIS with their respective terms and conditions.

Developments in Domestic Debt (First Nine Months of FY 2024)

1. Increase in Permanent Debt:
o Significant increase by Rs 5.7 trillion, with major contributions from PIBs (Rs 4.2
trillion) and GIS (Rs 1.5 trillion).
o Permanent debt is the largest component of domestic debt, highlighting the
government’s reliance on medium to long-term instruments for financing.
2. Reduction in Floating Debt:
o A notable reduction in the stock of T-bills by Rs 0.8 trillion, indicating a shift in
the government's short-term debt management strategy.
3. Reduction in Unfunded Debt:
o A net reduction of Rs 135 billion, showing a decrease in reliance on instruments
available under National Savings Schemes.
4. Other Developments:
o Naya Pakistan Certificates: Held by residents amounted to Rs 94 billion.
o SBP On-lending: Rs 475 billion against IMF SDRs.
o Loans from Banks: Rs 361 billion in foreign currency denominated domestic
debt.
Conclusion
The analysis of Pakistan’s domestic debt highlights significant shifts and strategies employed by
the government to manage its debt portfolio. The increase in permanent debt suggests a
preference for medium to long-term financing, while the reduction in floating and unfunded debt
indicates adjustments in short-term borrowing and reliance on National Savings Schemes. The
inclusion of Shariah-compliant instruments and other innovative securities like Naya Pakistan
Certificates demonstrates the government's effort to diversify its debt instruments and cater to a
broader investor base. Effective management of these components will be crucial for maintaining
fiscal stability and achieving sustainable economic growth.

Analyzing Pakistan’s External Public Debt: Composition,

Developments, and Currency Impact (FY 2024)

Overview
Pakistan's external public debt reached US$ 86.7 billion at the end of March 2024, marking an
increase of approximately US$ 2.6 billion in the first nine months of the current fiscal year. This
summary delves into the components, sources, inflows, outflows, and the impact of currency
fluctuations on external public debt, offering a comprehensive analysis of the debt landscape.

Composition of External Public Debt

1. Multilateral Sources
o Increase: US$ 1.7 billion.
o Main Inflows:
 IMF: US$ 1.9 billion.
 World Bank: US$ 1.4 billion.
 Asian Development Bank (ADB): US$ 657 million.
 Asian Infrastructure Investment Bank (AIIB): US$ 300 million.
o Characteristics: Concessional terms with low interest rates and long tenors.
2. Bilateral Sources
o Increase: US$ 648 million.
o Main Inflow: US$ 2 billion from Saudi Arabia (bilateral deposit).
3. Commercial Bank Loans and Eurobonds
 o Change: No change recorded.
4. Other Inflows
o Pakistan Banao Certificates, Naya Pakistan Certificates, and Non-resident
Investments in Government Securities: Increased by US$ 275 million.

Sources of External Public Debt

1. Multilateral Development Partners and Bilateral Countries
o Percentage: 53% from multilateral sources, 21% from bilateral sources.
o Characteristics: Concessional loans with long tenors and low interest rates.
2. Friendly Countries Deposits (China and Saudi Arabia)
o Percentage: 10%.
o Characteristics: Short-term loans (1-year) for balance of payment and budgetary
support.
3. Foreign Commercial Banks
o Percentage: 6%.
o Characteristics: Short-to-medium term loans (1-3 years) with market-based
interest rates.
4. International Capital Market Transactions
o Percentage: 9%.
o Instruments: Eurobonds and international Sukuk, representing long-term debt
with market-based interest rates.
5. Other Foreign Inflows
o Percentage: 1%.
o Instruments: Naya Pakistan Certificates, non-resident investments in government
securities, and Pakistan Banao Certificates.
o Characteristics: Short-to-medium term with market-based interest rates.

Historical Data and Trends (FY 2018 - FY 2024)

Table 9.8: External Public Debt (US$ million)
 1. Long-term Government Debt: Predominantly increases each year, with significant
portions from Paris Club, multilateral, and other bilateral sources.
2. Short-term Government Debt: Fluctuates, often influenced by multilateral loans and
local currency securities.
3. IMF Loans: Includes both federal government and central bank loans, contributing
significantly to the total external public debt.

Inflows and Outflows (FY 2024)

1. Inflows
o Total Disbursements: US$ 6,267 million.
o Breakdown:
 Multilateral Sources: US$ 2,706 million.
 World Bank: US$ 1,432 million.
 ADB: US$ 657 million.
 AIIB: US$ 300 million.
 Bilateral Sources: US$ 2,780 million (including US$ 2 billion from Saudi
Arabia).
 Naya Pakistan Certificates: US$ 781 million.
2. Outflows
o Total Repayments: US$ 5,330 million.
o Breakdown:
 Multilateral Debt: US$ 2.8 billion.
 Bilateral Debt: US$ 2 billion.
 Naya Pakistan Certificates: US$ 0.6 billion.
o Interest Payments: US$ 2,639 million.
Impact of Exchange Rate Fluctuations
1. Revaluation Gains: Appreciation of the US Dollar against other international currencies
reduced external public debt stock by US$ 293 million. Significant movements included:
o Euro: -0.6%
o Japanese Yen: -4.6%
o Pound Sterling: -0.3%
o Special Drawing Right (SDR): -0.5%
2. PKR Appreciation: The Pakistani Rupee appreciated by around 3% against the US
Dollar, decreasing the external public debt by approximately PKR 732 billion when
reported in Pakistani Rupees.

Conclusion
The increase in Pakistan’s external public debt during the first nine months of FY 2024 reflects a
diverse composition of multilateral, bilateral, and other financial sources, with significant
impacts from currency fluctuations. This analysis highlights the necessity for strategic
management of debt sources and terms to ensure long-term fiscal stability.
 Understanding the Problem
Factors Leading to High Public Debt Levels in Pakistan
Pakistan’s high public debt levels have been a significant concern for its economic stability and
growth. Various factors contribute to the rising debt burden, including structural economic
issues, political instability, fiscal mismanagement, and external shocks. Below is a detailed
examination of these factors, supported by recent statistics and evidence from reputable sources.
1. Fiscal Deficits
Evidence
Pakistan has persistently experienced fiscal deficits, where government expenditures exceed
revenues. In the fiscal year 2022-23, Pakistan's fiscal deficit was around 7.9% of GDP .
Impact
Fiscal deficits necessitate borrowing to bridge the gap between expenditures and revenues. This
borrowing adds to the public debt. Persistent deficits signal underlying structural issues in
revenue generation and expenditure management, leading to an accumulation of debt over time.
2. Low Tax Revenue
Evidence
Pakistan's tax-to-GDP ratio has historically been low, averaging around 10-12% in recent years .
For the fiscal year 2022-23, the tax-to-GDP ratio was approximately 9.4%, one of the lowest in
the region .
Impact
A low tax base means insufficient revenues to meet public expenditures, forcing the government
to resort to borrowing. This structural issue in revenue generation significantly contributes to the
growing public debt.
3. High Defense and Security Expenditures
Evidence
Defense and security expenditures consume a substantial portion of Pakistan's budget. For FY
2022-23, defense spending was allocated around 17.5% of the total federal budget .
Impact
High defense spending limits the funds available for development and social sector spending,
necessitating borrowing to finance other expenditures. This persistent high expenditure on
defense contributes to the overall debt levels.
4. Energy Sector Deficits
Evidence
The energy sector in Pakistan faces chronic deficits, known as circular debt. As of March 2023,
Pakistan's circular debt in the power sector was estimated to be around PKR 2.5 trillion
(approximately USD 15 billion) .
Impact
The inefficiencies and deficits in the energy sector require government subsidies and bailouts,
adding to the fiscal burden. This necessitates borrowing to cover the shortfalls, thereby
increasing public debt.
5. External Borrowings
Evidence
Pakistan's external debt has been rising, reaching USD 130 billion by the end of FY 2022-23 .
This includes loans from multilateral organizations, bilateral creditors, and international capital
markets.
Impact
Reliance on external borrowing exposes the country to exchange rate risks and global financial
market conditions. Depreciation of the Pakistani Rupee increases the cost of servicing external
debt, exacerbating the debt burden.
6. Exchange Rate Depreciation
Evidence
The Pakistani Rupee has depreciated significantly against the US Dollar over the past few years.
By June 2023, the Rupee had depreciated to around PKR 285 per USD from PKR 160 per USD
in 2020 .
Impact
Exchange rate depreciation increases the local currency cost of servicing external debt, leading to
higher debt servicing requirements. This puts additional pressure on government finances and
contributes to rising public debt.
7. Economic Growth Rates
Evidence
Pakistan's economic growth has been inconsistent, with growth rates fluctuating significantly. In
FY 2022-23, Pakistan's GDP growth rate was around 0.29%, down from 5.6% in the previous
fiscal year .
Impact
Low and inconsistent economic growth reduces the government's revenue base and its ability to
repay debt. Slow growth also limits investment and economic opportunities, exacerbating fiscal
deficits and leading to higher borrowing.
8. Political Instability
Evidence
Political instability has been a recurring issue in Pakistan, with frequent changes in government
and policy directions. This instability has often disrupted economic planning and fiscal
management .
Impact
Political instability undermines investor confidence, disrupts economic policies, and leads to
inefficient governance. This results in fiscal mismanagement and higher borrowing to meet
short-term financial needs, contributing to rising public debt.
9. Inflation and Monetary Policy
Evidence
Pakistan has experienced high inflation rates, with the Consumer Price Index (CPI) inflation
reaching 28.5% in April 2023 .
Impact
High inflation erodes the real value of revenues and increases the cost of government
expenditures. To manage inflation, monetary tightening is required, which can slow down
economic growth and reduce revenue generation, leading to higher fiscal deficits and borrowing.
10. External Shocks
Evidence
Pakistan has faced several external shocks, including the COVID-19 pandemic, global oil price
fluctuations, and geopolitical tensions. These shocks have adversely impacted economic
performance and fiscal stability .
Impact
External shocks disrupt economic activity, reduce revenues, and increase expenditures,
particularly on healthcare and social protection during crises like COVID-19. This leads to
higher borrowing to manage the economic fallout, adding to public debt.
11. Development Expenditures and Social Services
Evidence
Investment in infrastructure and social services is crucial for development but requires
substantial funding. For instance, the government allocated significant funds for development
projects in the Public Sector Development Programme (PSDP) 2022-23 .
Impact
While necessary for long-term growth, high development expenditures, in the absence of
adequate revenue generation, necessitate borrowing. This increases the public debt in the short to
medium term, highlighting the need for balanced fiscal management.
12. Subsidies and Public Sector Enterprises (PSEs)
Evidence
The government provides significant subsidies to various sectors, including agriculture and
energy. Additionally, many public sector enterprises are loss-making and require financial
support. As of 2023, subsidies and financial support to PSEs constituted a significant portion of
government expenditure .
Impact
Subsidies and bailouts for loss-making PSEs strain government finances, leading to higher
borrowing. Without reforms to make these enterprises profitable, the fiscal burden continues to
grow, contributing to rising public debt.
Conclusion
The high public debt levels in Pakistan are a result of a combination of structural economic
issues, fiscal mismanagement, political instability, and external shocks. Addressing these
challenges requires comprehensive reforms in tax policy, expenditure management, energy
sector, and governance. Improving economic growth, stabilizing the political environment, and
managing external vulnerabilities are crucial for achieving long-term debt sustainability.
Through well-targeted policies and reforms, Pakistan can manage its debt levels and ensure
economic stability and growth.

Overview of Pakistan’s Economy & Debt

Historical Context
Pakistan, established in 1947, inherited a nascent economy from British India, primarily agrarian
with limited industrial base and infrastructure. Over the years, the country's economic trajectory
has experienced significant fluctuations, influenced by domestic policies, geopolitical
developments, and global economic trends. The early years saw efforts to establish a
manufacturing base and infrastructure development, which were somewhat successful in the
1960s. The economy grew at an impressive rate, often cited as a model for developing countries.
However, the 1970s brought nationalization policies under Prime Minister Zulfikar Ali Bhutto,
which disrupted economic momentum and deterred private investment. The 1980s and 1990s
witnessed a shift back towards liberalization and privatization, but these decades were also
marked by political instability, inconsistent policies, and external shocks, including sanctions
following nuclear tests in 1998.

Recent Economic Trends

In the 21st century, Pakistan's economy has faced numerous challenges, including energy
shortages, security concerns, and political instability. Despite these hurdles, there have been
periods of robust growth, particularly during the mid-2000s, fueled by consumer demand,
foreign aid, and remittances from Pakistanis abroad. The China-Pakistan Economic Corridor
(CPEC), part of China's Belt and Road Initiative, has been a significant development, promising
infrastructure investments and economic growth.
However, Pakistan's economy remains constrained by structural issues such as a narrow tax base,
low investment in human capital, and a significant informal sector. The COVID-19 pandemic
further strained the economy, but recent measures, including fiscal and monetary interventions,
aim to stabilize and revitalize growth.

Historical Context of Public Debt in Pakistan

Early Years and Initial Debt Accumulation
Pakistan's public debt history began with its inception, borrowing initially to finance
developmental projects and infrastructure. The 1950s and 1960s saw moderate debt levels,
primarily from bilateral and multilateral sources. The emphasis was on infrastructure and
industrial development, aiming to lay the groundwork for economic growth.
Debt Accumulation in the 1970s and 1980s
The 1970s marked a significant shift, with nationalization policies leading to inefficiencies and
increased public sector borrowing. The 1980s, despite some liberalization, saw debt levels rise
due to defense expenditures and fiscal deficits. The International Monetary Fund (IMF) and
World Bank became critical sources of funding, imposing structural adjustment programs aimed
at fiscal consolidation and economic reforms.
Debt Trends in the 1990s and Early 2000s
The 1990s continued the trend of rising debt, exacerbated by political instability and sanctions.
However, the early 2000s witnessed efforts to manage debt through rescheduling and structural
reforms under IMF programs. The Paris Club rescheduling in 2001 and prudent economic
management during this period provided some relief.
Recent Trends and Current Situation
In recent years, Pakistan's public debt has continued to rise, driven by fiscal deficits, defense
spending, and developmental needs. As of 2023, the public debt stands at approximately 90% of
GDP, with a significant portion owed to external creditors. CPEC-related borrowing has added to
the debt stock, although it is expected to spur economic growth in the long run.

Definition of Public Debt

Explanation of Public Debt
Public debt, also known as national or government debt, refers to the total amount of money that
a government owes to creditors. It is an accumulation of deficits over time, representing the
borrowing needs of a government to finance expenditures exceeding its revenues.
Types of Public Debt
Domestic Debt
Domestic debt is the portion of public debt owed to creditors within the country. It includes
borrowings through instruments such as treasury bills, government bonds, and other financial
securities issued in the domestic market. Domestic debt is usually denominated in the local
currency and is considered less risky compared to external debt, as it is subject to domestic
monetary policies.
External Debt
External debt is the portion of public debt owed to foreign creditors. This includes loans from
foreign governments, international financial institutions (such as the IMF and World Bank), and
private sector entities. External debt is often denominated in foreign currencies, making it
susceptible to exchange rate fluctuations and international economic conditions.

Importance of the Topic

Significance of Studying Public Debt in Pakistan
Studying public debt in Pakistan is crucial for several reasons. First, high levels of public debt
can lead to substantial debt servicing costs, which can crowd out essential public investments in
infrastructure, health, and education. Understanding the dynamics of public debt helps
policymakers devise strategies to manage and mitigate these costs, ensuring sustainable
economic development.
Relevance to Economic Stability and Growth
Economic Stability
High public debt levels can undermine economic stability by increasing vulnerability to external
shocks and economic downturns. Debt sustainability is a critical factor in maintaining investor
confidence and ensuring access to international financial markets. By studying public debt,
policymakers can identify potential risks and implement measures to enhance economic
resilience.
Economic Growth
Effective debt management is essential for fostering economic growth. Sustainable debt levels
enable the government to invest in key sectors, stimulate economic activity, and create jobs.
Conversely, unsustainable debt can lead to austerity measures, stifling growth and exacerbating
social inequalities. Analyzing public debt trends and their impact on economic growth provides
insights for formulating policies that balance growth with fiscal responsibility.

Data and Statistics

Current Public Debt Levels
As of 2023, Pakistan's public debt stands at approximately PKR 50 trillion, with external debt
constituting around 40% of the total. The debt-to-GDP ratio is about 90%, reflecting a significant
increase from previous decades.
Debt Servicing Costs
Debt servicing costs have also risen, with interest payments constituting a substantial portion of
government expenditures. In FY 2022-23, interest payments on public debt amounted to
approximately PKR 3.5 trillion, accounting for nearly 40% of total government revenues.
Impact on Fiscal Deficit
The high debt burden has contributed to persistent fiscal deficits, averaging around 7% of GDP
in recent years. This has necessitated continued borrowing, creating a vicious cycle of debt
accumulation and servicing.
External Debt Composition
External debt is predominantly owed to multilateral and bilateral creditors, with the IMF, World
Bank, and China being significant lenders. Commercial borrowings and Eurobonds also
constitute a portion of external debt, adding to the complexity of debt management.

Debt Management Strategies

The government has implemented various strategies to manage public debt, including:
 Fiscal Reforms: Efforts to broaden the tax base, improve tax administration, and reduce
fiscal deficits.
 Debt Restructuring: Negotiations with creditors for rescheduling and restructuring debt
to extend maturities and reduce interest rates.
 Economic Reforms: Structural reforms aimed at enhancing economic growth and
diversification to reduce reliance on debt financing.

Conclusion
Understanding the historical context and current state of public debt in Pakistan is essential for
devising effective debt management strategies. High public debt levels pose significant
challenges to economic stability and growth, necessitating prudent fiscal management and
economic reforms. By analyzing public debt dynamics and their implications, policymakers can
ensure sustainable development and economic resilience.

Historical Perspective of Public Debt in Pakistan

A. Pre-Independence Era
Economic Conditions and Debt Management under British Rule
Before gaining independence in 1947, the regions that now constitute Pakistan were part of
British India. The economic conditions under British rule were marked by colonial exploitation
and an economic system designed to benefit the British Empire. The subcontinent’s wealth was
systematically extracted through various means, including heavy taxation, the deindustrialization
of local industries, and the forced cultivation of cash crops for export.
The public debt during the colonial period was managed primarily by the British authorities. The
debt was incurred mainly to finance infrastructure projects such as railways, telegraph lines, and
irrigation systems, which were intended to facilitate resource extraction and control. However,
the burden of this debt fell on the Indian populace, as the revenues generated through taxation
were used to service these debts.
By the time of independence, British India had accumulated significant debt. Upon partition,
Pakistan inherited a portion of this debt along with a largely agrarian economy, limited industrial
base, and underdeveloped infrastructure. The nascent state of Pakistan faced immense
challenges, including the need to establish governmental institutions, manage mass migrations,
and ensure economic stability.

B. Post-Independence Period (1947-1970)

Initial Challenges and Debt Accumulation
The early years of Pakistan's independence were fraught with economic challenges. The country
had to rebuild and expand its infrastructure, establish industries, and provide for a rapidly
growing population. To finance these needs, Pakistan began borrowing both domestically and
externally.
Domestic Debt: The government issued various forms of domestic debt instruments, such as
treasury bills and bonds, to finance budget deficits. The domestic financial market was still in its
infancy, limiting the scope and scale of domestic borrowing.
External Debt: Pakistan also sought financial assistance from international sources. This
included loans from bilateral and multilateral institutions such as the World Bank and the
International Monetary Fund (IMF). External borrowing was crucial for financing development
projects, particularly in infrastructure and industrial sectors.
During the 1950s and 1960s, Pakistan's economy experienced periods of significant growth,
particularly during the "Green Revolution," which saw substantial improvements in agricultural
productivity. However, this growth was uneven, with benefits accruing mainly to the industrial
and urban sectors, while rural areas lagged behind.
By the end of the 1960s, Pakistan's public debt had increased substantially, driven by the need to
finance development projects and maintain economic stability. The debt-to-GDP ratio rose,
signaling growing concerns about debt sustainability.

C. Nationalization and Economic Reforms (1970-1990)

Impact of Nationalization on Public Debt
The 1970s marked a significant shift in Pakistan's economic policy under Prime Minister
Zulfikar Ali Bhutto. The government embarked on a series of nationalization measures, taking
control of major industries, banks, and insurance companies. These policies aimed to reduce
income inequality and increase state control over the economy.
Economic Impact: Nationalization led to inefficiencies and a decline in productivity in the
public sector. The mismanagement of state-owned enterprises resulted in financial losses and
increased fiscal deficits. To cover these deficits, the government resorted to additional
borrowing, exacerbating the public debt situation.
Debt Restructuring and Economic Policies
During the 1980s, Pakistan began to reverse some of the nationalization policies and
implemented economic reforms aimed at liberalizing the economy. The government sought
assistance from the IMF and the World Bank, leading to structural adjustment programs (SAPs)
designed to stabilize the economy and promote growth.
IMF and World Bank Programs: The SAPs included measures such as fiscal austerity, trade
liberalization, and privatization of state-owned enterprises. These programs also involved debt
restructuring agreements to manage and reschedule existing debt, providing temporary relief
from debt servicing pressures.
Despite these efforts, the economic performance remained mixed. While some sectors showed
improvement, the overall debt levels continued to rise. The fiscal discipline required by the SAPs
often clashed with the need for social and developmental expenditures, leading to political and
social tensions.

D. Privatization and Liberalization (1990-2000)

Shift Towards Market Economy and Its Effects on Debt
The 1990s witnessed a significant shift towards market-oriented economic policies under various
governments. The focus was on privatization, deregulation, and liberalization to promote private
sector growth and attract foreign investment.
Privatization: The government undertook extensive privatization of state-owned enterprises,
aiming to reduce the fiscal burden and improve efficiency. While privatization generated revenue
and improved certain sectors' performance, it also led to job losses and social unrest.
Liberalization: Trade liberalization and financial sector reforms were implemented to integrate
Pakistan more closely with the global economy. These measures included reducing trade
barriers, liberalizing exchange rates, and encouraging foreign direct investment (FDI).
Impact on Debt: The liberalization policies had mixed results. While they stimulated economic
growth in some areas, they also increased vulnerability to external shocks. The Asian financial
crisis in the late 1990s, for instance, highlighted the risks associated with rapid liberalization.
Pakistan's public debt continued to grow, driven by fiscal deficits and the need to finance
development projects.
By the end of the decade, Pakistan's debt situation had become precarious. The debt-to-GDP
ratio had risen significantly, and the country faced mounting debt servicing obligations. The
government sought further assistance from international financial institutions to manage the debt
burden.

E. Recent Decades (2000-Present)

Modern Trends and Current Debt Levels
The 21st century has seen significant changes in Pakistan's public debt dynamics. The early
2000s witnessed efforts to stabilize the economy and manage the debt burden through various
measures.
Debt Restructuring and Relief: In the early 2000s, Pakistan received debt relief and
rescheduling agreements from the Paris Club, a group of major creditor countries. These
agreements provided temporary relief and helped stabilize the debt situation.
Economic Growth and Debt Accumulation: The mid-2000s saw a period of robust economic
growth, driven by consumer demand, remittances, and foreign aid. However, this growth was not
sustained, and the global financial crisis of 2008 had a significant impact on Pakistan's economy.
CPEC and Infrastructure Investment: The China-Pakistan Economic Corridor (CPEC),
launched in 2013, has been a major development initiative. It involves substantial Chinese
investment in infrastructure, energy, and industrial projects. While CPEC has the potential to
spur economic growth, it has also added to Pakistan's external debt burden.
Current Debt Levels: As of 2023, Pakistan's public debt stands at approximately 90% of GDP.
The debt is a mix of domestic and external obligations, with external debt constituting around
40% of the total. The debt servicing costs have also risen, with interest payments consuming a
significant portion of government revenues.

Impact of Global Financial Crises

The global financial crises of the late 2000s and early 2010s had profound effects on Pakistan's
economy and public debt. The crises led to a slowdown in global economic activity, reduced
demand for exports, and volatility in capital flows. These factors exacerbated Pakistan's
economic challenges and increased reliance on external borrowing.
Response to Crises: The government implemented various measures to mitigate the impact of
the global financial crises. These included seeking assistance from the IMF, implementing fiscal
and monetary policies to stabilize the economy, and pursuing structural reforms to enhance
economic resilience.
Long-term Impact: The long-term impact of the global financial crises on Pakistan's public debt
has been significant. The crises highlighted the vulnerabilities of the economy to external shocks
and underscored the need for prudent debt management and economic diversification.
Debt Servicing Costs (2023)
 Interest Payments: PKR 3.5 trillion
 Debt Servicing as Percentage of Government Revenue: 40%
External Debt Composition (2023)
 Multilateral Creditors: 45%
 Bilateral Creditors: 35%
 Commercial Borrowings and Eurobonds: 20%

Conclusion
The historical perspective of public debt in Pakistan reveals a complex interplay of economic
policies, external factors, and developmental needs. From the colonial era to the present day,
public debt has been a crucial component of Pakistan's economic strategy, enabling infrastructure
development and growth while also posing significant challenges.
The pre-independence era set the stage with an economic structure designed for colonial
exploitation, leading to an inherited debt burden. The post-independence period saw initial debt
accumulation to finance development amidst economic and political challenges. The
nationalization policies of the 1970s increased inefficiencies and debt, while subsequent
economic reforms and liberalization efforts aimed to stabilize the economy but also exposed it to
external vulnerabilities.
In recent decades, Pakistan's public debt has continued to rise, driven by fiscal deficits,
development needs, and external shocks. Initiatives like CPEC hold promise for economic
growth but also add to the debt burden. The impact of global financial crises has further
underscored the importance of prudent debt management and economic diversification.
Understanding the historical context and current state of public debt in Pakistan is essential for
formulating effective policies that ensure sustainable economic growth and stability. By
analyzing past trends and learning from previous experiences, policymakers can devise strategies
to manage public debt responsibly and foster long-term economic resilience.

Causes of Public Debt in Pakistan

A. Fiscal Deficit
Persistent Budget Deficits and Government Borrowing
One of the primary causes of public debt in Pakistan is the persistent fiscal deficit, which arises
when a government's expenditures exceed its revenues. This imbalance forces the government to
borrow to finance its spending, leading to an accumulation of public debt over time.
Historical Trends: Pakistan has experienced chronic fiscal deficits since its independence in
1947. Various factors contribute to these deficits, including inadequate tax revenue, high public
expenditure, and inefficiencies in public sector enterprises.
Tax Revenue: Pakistan has one of the lowest tax-to-GDP ratios in the world, hovering around
10-12% in recent years. This low tax base is due to a narrow tax net, widespread tax evasion, and
a large informal economy. Efforts to broaden the tax base and improve tax administration have
met with limited success.
Public Expenditure: On the expenditure side, Pakistan faces high costs related to defense,
public sector salaries, debt servicing, and subsidies. Social sector spending, particularly on health
and education, is also substantial, though often inadequate relative to needs.
Debt Accumulation: To cover the fiscal deficits, the government resorts to both domestic and
external borrowing. Domestic borrowing includes issuing treasury bills and government bonds,
while external borrowing involves loans from international financial institutions and bilateral
donors.
Data and Statistics: As of FY 2022-23, Pakistan's fiscal deficit was approximately 7% of GDP,
with total public debt standing at around PKR 50 trillion (about USD 300 billion). The persistent
fiscal deficit has been a significant driver of debt accumulation over the decades.

B. Trade Imbalance
High Import Bills vs. Low Export Revenues
Another major factor contributing to public debt in Pakistan is the persistent trade imbalance.
The country consistently imports more than it exports, leading to current account deficits and
increased reliance on external borrowing to finance the gap.
Import Bill: Pakistan's import bill is high due to the country's reliance on imported goods,
including oil, machinery, and industrial raw materials. Energy imports, in particular, constitute a
significant portion of the total import bill, as the country struggles to meet its energy needs
domestically.
Export Revenues: On the export side, Pakistan faces challenges in diversifying its export base
and increasing export revenues. The country primarily exports textiles, which account for about
60% of total exports. However, the sector faces stiff competition from other textile-producing
countries, and global demand fluctuations can impact revenues.
Trade Deficit: The resulting trade deficit necessitates borrowing to finance the gap. This
borrowing includes short-term commercial loans, long-term concessional loans, and aid from
international donors. The trade imbalance thus directly contributes to the accumulation of
external debt.
Data and Statistics: In FY 2021-22, Pakistan's trade deficit stood at approximately USD 39
billion, with exports of around USD 31 billion and imports of about USD 70 billion. The current
account deficit was around 4-5% of GDP, underscoring the ongoing challenge of trade
imbalance.

C. Political Instability
Frequent Changes in Government and Inconsistent Policies
Political instability has been a recurring issue in Pakistan, significantly impacting economic
management and contributing to public debt. Frequent changes in government, policy reversals,
and political uncertainty undermine investor confidence and economic stability.
Historical Context: Since independence, Pakistan has experienced numerous military coups,
political upheavals, and short-lived civilian governments. This instability disrupts long-term
economic planning and policy implementation.
Inconsistent Policies: The frequent changes in government lead to inconsistent economic
policies. Each new administration often reverses or abandons the policies of its predecessor,
resulting in a lack of continuity and long-term strategic vision. This inconsistency affects fiscal
discipline, investment climate, and overall economic performance.
Impact on Debt: Political instability also affects the government's ability to implement
necessary reforms, such as tax administration improvements and public sector restructuring. This
lack of reform perpetuates fiscal deficits and reliance on borrowing to finance government
operations.
Data and Statistics: Over the past three decades, Pakistan has seen 12 different prime ministers,
with political transitions often accompanied by economic volatility. The lack of stable
governance has hindered consistent economic policy-making and contributed to the
accumulation of public debt.

D. Defense Expenditures
High Military Spending and Its Impact on National Debt
High defense expenditures are a significant factor contributing to Pakistan's public debt. The
country's geopolitical situation, particularly its relations with neighboring India and its role in
regional security, necessitates substantial spending on defense.
Defense Budget: Pakistan allocates a significant portion of its budget to defense spending. This
includes expenditures on military personnel, equipment, and operations. The defense budget is
often prioritized over other critical sectors such as health and education.
Historical Context: The defense spending has been influenced by historical conflicts, including
wars with India and ongoing security challenges. The military's role in national security and
politics further underscores the emphasis on defense spending.
Impact on Debt: The high defense expenditure contributes to fiscal deficits, necessitating
borrowing to finance the gap. While defense is a crucial aspect of national security, the
opportunity cost is significant, as resources are diverted from developmental and social sectors.
Data and Statistics: In FY 2022-23, Pakistan's defense budget was approximately PKR 1.53
trillion (about USD 9.2 billion), accounting for around 16% of total government expenditure.
The high defense spending, in the context of limited fiscal space, exacerbates the public debt
burden.

E. Economic Mismanagement
Inefficient Public Sector Enterprises and Corruption
Economic mismanagement, particularly in public sector enterprises (PSEs) and governance, has
played a crucial role in the accumulation of public debt in Pakistan. Inefficiencies, corruption,
and lack of accountability in the public sector have led to financial losses and increased
borrowing.
Public Sector Enterprises: PSEs in Pakistan, including Pakistan International Airlines (PIA),
Pakistan Steel Mills, and various state-owned utilities, have been plagued by inefficiencies and
financial losses. These enterprises require continuous financial support from the government,
adding to fiscal deficits and public debt.
Corruption: Corruption and lack of transparency in governance have further exacerbated
economic mismanagement. Misallocation of resources, kickbacks, and embezzlement of public
funds undermine economic performance and fiscal stability.
Reform Efforts: Various governments have attempted to reform PSEs and improve governance,
with mixed results. Privatization and restructuring efforts have faced resistance and
implementation challenges.
Impact on Debt: The financial losses of PSEs and the costs associated with corruption
contribute to fiscal deficits, necessitating borrowing to cover the shortfall. Improved
management and governance are essential to reduce these fiscal pressures.
Data and Statistics: As of 2023, PSEs in Pakistan have accumulated losses amounting to
billions of dollars. For example, PIA alone has debt liabilities exceeding PKR 400 billion (about
USD 2.4 billion), necessitating continuous government support.

F. External Factors
International Loans and Aid Conditions
External factors, including international loans and aid conditions, play a significant role in
shaping Pakistan's public debt dynamics. The reliance on external financing to meet fiscal and
development needs introduces vulnerabilities and dependencies.
International Loans: Pakistan borrows from various international financial institutions,
including the IMF, World Bank, and Asian Development Bank. These loans are essential for
financing development projects, stabilizing the economy, and managing fiscal deficits.
Aid Conditions: International loans and aid often come with conditions, including structural
adjustment programs and economic reforms. While these conditions aim to improve economic
management, they can also lead to short-term economic hardship and social unrest.
Debt Servicing: The borrowing from external sources increases the debt servicing burden, as
loans must be repaid with interest. Fluctuations in exchange rates and global economic
conditions can further impact debt servicing costs.
Impact on Debt: The reliance on external financing contributes to the accumulation of public
debt. While it provides necessary funding, it also introduces dependencies and vulnerabilities to
external shocks.
Data and Statistics: As of 2023, Pakistan's external debt stands at approximately USD 120
billion, with a significant portion owed to multilateral and bilateral creditors. The debt servicing
costs have risen, with interest payments on external debt constituting a substantial part of
government expenditures.

Conclusion
The causes of public debt in Pakistan are multifaceted, involving a combination of fiscal,
economic, political, and external factors. Persistent fiscal deficits, driven by inadequate tax
revenues and high public expenditures, necessitate continuous borrowing. The trade imbalance,
characterized by high import bills and low export revenues, further exacerbates the debt
situation.
Political instability and frequent changes in government undermine consistent economic policy-
making and long-term planning. High defense expenditures, driven by geopolitical
considerations, contribute significantly to fiscal deficits and public debt. Economic
mismanagement, particularly in public sector enterprises and governance, results in financial
losses and increased borrowing.
External factors, including international loans and aid conditions, introduce dependencies and
vulnerabilities to global economic conditions. The reliance on external financing to meet fiscal
and development needs adds to the debt burden and debt servicing costs.
Addressing the public debt issue in Pakistan requires a comprehensive approach involving fiscal
reforms, economic diversification, improved governance, and prudent debt management. By
understanding the root causes and implementing targeted policies, Pakistan can work towards
sustainable economic growth and reduced debt dependency.

Impact of Public Debt on Pakistan’s Economy

A. Economic Growth
How High Debt Affects GDP Growth Rates
Public debt has a profound impact on Pakistan's economic growth. High levels of debt can
constrain the government's ability to invest in productive sectors, leading to slower GDP growth.
Debt Overhang: When a country accumulates excessive debt, it faces a debt overhang, where
the cost of servicing debt becomes so high that it stifles economic growth. For Pakistan, this
situation means that significant portions of the budget are allocated to debt servicing rather than
developmental projects. This limits the government's ability to invest in infrastructure, education,
and healthcare, which are critical for long-term economic growth.
Crowding Out Effect: High public debt often leads to increased borrowing from domestic
sources, which can crowd out private investment. When the government borrows heavily from
the domestic market, it can drive up interest rates, making it more expensive for private
businesses to borrow and invest. This crowding-out effect reduces private sector growth, which
is crucial for economic development.
Data and Statistics: Pakistan’s public debt-to-GDP ratio has been steadily increasing, reaching
around 90% in 2023. Historical data shows that countries with debt-to-GDP ratios exceeding
77% experience a slowdown in economic growth rates. For instance, in Pakistan, GDP growth
slowed to around 3.5% in 2022 from an average of 5% in the early 2000s.
Long-Term Growth: Sustained high levels of public debt can lead to lower long-term growth
prospects. The resources that could be used for productive investments are instead diverted to
service debt. This diversion reduces the potential for innovation, productivity improvements, and
overall economic expansion.

B. Inflation and Interest Rates

Relationship between Debt Levels and Macroeconomic Indicators
The relationship between public debt, inflation, and interest rates is intricate and significant for
understanding the broader macroeconomic impacts.
Inflation: High levels of public debt can lead to inflationary pressures. When a government
borrows excessively, it might resort to monetizing the debt, which involves printing more
money. This increase in money supply can lead to inflation if not matched by an increase in
goods and services. In Pakistan, periods of high public debt have often been accompanied by
rising inflation rates. For example, in 2022, inflation in Pakistan soared to around 12%, partly
due to fiscal imbalances and high debt levels.
Interest Rates: Elevated public debt can also influence interest rates. As the government
competes with the private sector for limited financial resources, the increased demand for funds
can drive up interest rates. Higher interest rates make borrowing more expensive for both the
government and the private sector. In Pakistan, the policy rate set by the State Bank of Pakistan
(SBP) has been relatively high, reaching 15% in 2022, partly due to the need to manage inflation
and stabilize the currency amidst high debt levels.
Debt Servicing Costs: High interest rates increase the cost of debt servicing. For Pakistan,
interest payments constitute a significant portion of government expenditure. In FY 2022-23,
debt servicing costs were about 40% of total government revenue, reducing the fiscal space
available for other critical expenditures.
Macroeconomic Stability: Persistent high debt and its associated effects on inflation and
interest rates can undermine macroeconomic stability. Unstable macroeconomic conditions deter
investment, both domestic and foreign, and can lead to a vicious cycle of slow growth, higher
debt, and increased economic vulnerability.

C. Investment and Business Environment

Impact on Foreign and Domestic Investments
Public debt significantly affects the investment climate and the overall business environment in
Pakistan.
Investor Confidence: High levels of public debt can erode investor confidence. Investors, both
foreign and domestic, are wary of economies with high debt levels due to the increased risk of
financial instability and potential for default. The perception of risk associated with high debt
levels can deter foreign direct investment (FDI), which is crucial for economic growth and
development.
Cost of Capital: As previously mentioned, high public debt can lead to higher interest rates.
This increases the cost of capital for businesses, making it more expensive for them to finance
investments. In Pakistan, the high cost of borrowing has been a barrier to private sector growth,
particularly for small and medium enterprises (SMEs) that are more sensitive to borrowing costs.
Government Spending Priorities: High debt levels often force governments to prioritize debt
servicing over investment in public infrastructure and services. This underinvestment in public
goods can reduce the overall attractiveness of the business environment. For instance, inadequate
infrastructure, such as poor transportation and energy supply, can increase operational costs for
businesses and reduce their competitiveness.
Data and Statistics: FDI in Pakistan has been fluctuating and relatively low compared to its
potential. In 2021, FDI inflows were about USD 1.85 billion, significantly lower than in regional
peers like India and Bangladesh. The high public debt and associated economic risks are
contributing factors to this low level of investment.
Private Sector Growth: The private sector's ability to grow and expand is crucial for economic
development. However, high public debt and the associated high borrowing costs and economic
uncertainties hinder private sector growth. This limitation on the private sector’s growth
potential can slow down overall economic progress.

D. Public Services and Social Welfare

Resource Allocation and Its Effect on Public Services
The impact of public debt on resource allocation significantly affects the provision of public
services and social welfare programs in Pakistan.
Debt Servicing Priority: High levels of public debt necessitate significant budget allocations for
debt servicing. This prioritization often comes at the expense of essential public services such as
healthcare, education, and social welfare programs. In Pakistan, this trade-off is particularly
stark. In FY 2022-23, the government allocated around 40% of its revenue to debt servicing,
leaving limited resources for critical social sectors.
Health and Education: Underinvestment in health and education has long-term negative
implications for human capital development and economic growth. Pakistan already faces
significant challenges in these sectors. The country’s expenditure on education is about 2.5% of
GDP, and on health, it is around 1.2% of GDP, both of which are lower than the recommended
levels by international organizations. The high public debt exacerbates this underinvestment,
limiting improvements in literacy rates, health outcomes, and overall human development.
Social Welfare Programs: High debt levels also restrict the government’s ability to expand
social safety nets and welfare programs. In a country where a significant portion of the
population lives below the poverty line, these programs are crucial for reducing poverty and
inequality. However, fiscal constraints imposed by high debt levels mean that these programs are
often underfunded.
Public Infrastructure: Investment in public infrastructure is essential for economic
development. High debt servicing costs reduce the government’s ability to invest in
infrastructure projects such as roads, bridges, and energy supply, which are vital for economic
activity and improving the quality of life for citizens.
Data and Statistics: Pakistan's social indicators reflect the challenges posed by high public debt
and limited public spending. The Human Development Index (HDI) ranking for Pakistan was
154 out of 189 countries in 2020. The underinvestment in social sectors due to high debt
servicing costs plays a significant role in these poor outcomes.

E. Sovereignty and Policy Autonomy

Influence of International Creditors on National Policies
High levels of public debt, particularly external debt, can undermine a country's sovereignty and
policy autonomy. This is a significant issue for Pakistan, where international creditors often
influence national economic policies.
Conditionalities and Structural Adjustments: International financial institutions such as the
IMF and World Bank provide loans to countries under specific conditions. These conditions
often include structural adjustment programs (SAPs) that mandate policy changes aimed at fiscal
consolidation, economic liberalization, and market-oriented reforms. While these reforms can
lead to improved economic management, they also limit the government's ability to pursue
independent policy choices.
Economic Policy Constraints: The need to comply with loan conditions can constrain
Pakistan’s economic policy options. For example, austerity measures required under SAPs often
include cuts in public spending, which can negatively impact social services and welfare
programs. The focus on fiscal consolidation can also limit the government's ability to implement
counter-cyclical policies during economic downturns.
Sovereignty and Decision-Making: High levels of external debt can lead to increased scrutiny
and influence from international creditors. This influence can extend to key areas of economic
and fiscal policy, reducing the government's autonomy in decision-making. For instance, during
periods of economic crisis, Pakistan has often had to negotiate bailout packages with the IMF,
which come with stringent conditions and close monitoring.
Data and Statistics: Pakistan has had 22 IMF programs since 1958, reflecting its frequent need
to seek external assistance to manage its economy. The conditions attached to these programs
have had significant impacts on the country's economic policies and governance structures.
Geopolitical Considerations: In addition to economic policies, high levels of debt to specific
countries can influence geopolitical relationships. For example, the significant debt owed to
China under the China-Pakistan Economic Corridor (CPEC) has strategic implications for
Pakistan's foreign policy and economic priorities.

Conclusion
The impact of public debt on Pakistan’s economy is multifaceted and profound. High debt levels
constrain economic growth by diverting resources from productive investments to debt servicing.
This situation creates a debt overhang and a crowding-out effect, which hampers private sector
growth and limits long-term economic prospects.
The relationship between public debt, inflation, and interest rates further complicates
macroeconomic stability. High debt levels can lead to inflationary pressures and higher interest
rates, increasing the cost of capital for businesses and reducing investment.
The investment and business environment are also negatively impacted by high public debt.
Investor confidence is eroded, and the cost of capital rises, deterring both domestic and foreign
investments.
 Miscellaneous Information related to the
Topic
Understanding Public Debt: Pakistan vs. USA
The disparity between the economic perceptions of Pakistan and the USA, despite their
respective public debt-to-GDP ratios, stems from several factors, including the nature of their
economies, economic structures, credibility, and external and internal factors. Here’s a detailed
analysis:

Nature of Economies
1. Economic Size and Resilience:
o United States: The US economy is the largest in the world with a GDP of
approximately $25 trillion (2023). Its diverse and advanced economy can better
absorb and manage high levels of debt.
o Pakistan: Pakistan's GDP is much smaller, around $376 billion (2023). A smaller
economy means less revenue and fewer resources to manage debt, making it more
vulnerable to economic shocks.
2. Economic Structure:
o United States: The US economy is highly diversified, with strong industrial,
technological, and service sectors. This diversification provides stability and
resilience.
o Pakistan: Pakistan's economy relies heavily on agriculture, which is vulnerable to
environmental factors, and has less diversification in industrial and technological
sectors.

Debt Characteristics
1. Currency of Debt:
o United States: The majority of US debt is denominated in its own currency
(USD), which it can print. This significantly reduces the risk of default.
o Pakistan: A substantial portion of Pakistan’s debt is in foreign currencies. This
increases the risk of default, especially when the local currency depreciates.
2. Credibility and Investor Confidence:
o United States: The US is considered a safe haven for investors. Its debt is backed
by a robust legal and financial system, and the dollar is the world’s primary
reserve currency.
 o Pakistan: Pakistan has a history of political instability and inconsistent economic
policies, leading to lower investor confidence and higher borrowing costs.

Economic Indicators
1. Inflation and Interest Rates:
o United States: Relatively stable inflation and lower interest rates mean cheaper
borrowing costs.
o Pakistan: Higher inflation and interest rates increase the cost of debt servicing,
straining the economy further.
2. Foreign Reserves:
o United States: Substantial foreign reserves and the ability to borrow at low rates.
o Pakistan: Limited foreign reserves make it challenging to meet debt obligations
and import essential goods.

Governance and Policy

1. Fiscal Policy:
o United States: Strong fiscal policies and measures to manage debt effectively,
including the ability to implement large-scale stimulus packages.
o Pakistan: Often faces fiscal mismanagement, corruption, and a lack of effective
policy implementation.
2. Monetary Policy:
o United States: The Federal Reserve's policies are globally influential and
maintain economic stability.
o Pakistan: The State Bank of Pakistan has less influence globally and faces more
challenges in stabilizing the economy.

International Relations and Aid

1. Global Influence:
o United States: As a superpower, the US has significant global influence and
receives favorable terms from international creditors.
o Pakistan: Limited global influence means less favorable borrowing terms and
reliance on international aid and bailouts.
2. IMF and World Bank Programs:
o United States: Does not rely on IMF or World Bank programs.
 o Pakistan: Frequent reliance on IMF programs, which come with stringent
conditions that can impact economic growth and stability.

Expert Opinions
1. Moody's and S&P Ratings:
o United States: Holds high credit ratings, reflecting strong confidence in its ability
to manage and repay debt.
o Pakistan: Lower credit ratings indicate higher risk of default and economic
instability.
2. Economic Analysts:
o Paul Krugman (Nobel Prize-winning economist): Emphasizes that the US can
handle high debt due to its economic scale and currency control.
o Atif Mian (Pakistani economist): Highlights Pakistan’s structural issues,
including dependency on external borrowing and lack of fiscal discipline,
contributing to its economic challenges.

Latest Statistics and Trends

1. Debt-to-GDP Ratio:
o United States: The debt-to-GDP ratio has been rising but remains manageable
due to the factors mentioned above.
o Pakistan: A rising debt-to-GDP ratio poses a significant risk, as evidenced by the
economic crisis in 2022.
2. Economic Growth:
o United States: Continues to grow, albeit at a slower rate, with innovations in
technology and services driving the economy.
o Pakistan: Faces slow growth, hampered by political instability, lack of
infrastructure, and external debt pressures.

Conclusion
The perception of Pakistan as a failed economy nearing default in 2022, despite having a lower
debt-to-GDP ratio compared to the USA, is influenced by a complex interplay of economic size,
structure, credibility, policy effectiveness, and international influence. The USA’s economic
power and stability provide it with a cushion against high debt levels, while Pakistan's
vulnerabilities expose it to greater risks and economic instability.
Public Sector Enterprises in Pakistan: Debt, Reforms, and
Privatization Efforts
Introduction
Despite receiving substantial funds from the Asian Development Bank (ADB) for reforms,
Pakistan's public sector enterprises (PSEs) continue to face mounting debt. This summary
outlines the current state of PSE debt, government strategies for privatization, the historical
context of ADB loans for PSE reforms, and the challenges in implementing these reforms.

Current State of PSE Debt

Debt Accumulation
The cumulative debt of Pakistan's PSEs has reached Rs1.7 trillion, with an additional borrowing
of over Rs43 billion during the fiscal year 2024 (FY24). Despite the funds allocated for reforms,
the debt continues to rise.
 FY24 Borrowing: PSE borrowing for FY24 (July 1 to June 21) amounted to Rs43.5
billion, compared to Rs260 billion in FY23.
 Total Debt: The debt stock of PSEs at the end of FY23 was Rs1.687 trillion, which
increased to Rs1.73 trillion with the additional borrowing in FY24.

Government Allocations
For the fiscal year 2024-25, the government allocated Rs1.267 trillion for PSEs, marking a 104%
increase over the outgoing FY24. The largest portion of this allocation will be provided through
subsidies and grants.

Government's Privatization Strategy

Economic Priority
The government's top economic priority is the privatization of PSEs to reduce the heavy burden
on the national budget. This is also a prerequisite for securing future loans from the International
Monetary Fund (IMF).
Challenges in Privatization
The privatization of loss-making PSEs remains a contentious political issue, particularly for large
public companies that provide significant employment. In an economy with limited job
opportunities, political considerations often outweigh economic ones.
 Key PSEs: Successive governments have failed to reform key PSEs such as Pakistan
Railways, Pakistan International Airlines (PIA), and Pakistan Steel Mills.

ADB Loans for PSE Reforms

Initial Loan Agreements
On June 28, 2016, the Economic Affairs Division and the ADB signed a $300 million loan
agreement for the Public Sector Enterprises Reform Programme (PSERP). This was followed by
another $300 million for sub-programme two in June 2017.
 Objective: The loans aimed to support the government's agenda for PSE reforms by
improving corporate governance, accountability, and fiscal management.
Implementation Issues
Despite the financial support, the reforms have not been effectively implemented. The program's
goal to improve the performance of PSEs and create fiscal space for development projects
remains unachieved.
 Political Obstacles: Political resistance to privatization and reform has hindered
progress. Large PSEs continue to rely on regular discretionary fiscal transfers and
sovereign credit guarantees to maintain operations.

Key Areas of Reform

Corporate Governance and Accountability
The ADB program aimed to enhance corporate governance and accountability in PSEs to
improve service delivery and revenue generation. This included:
 Performance Management: Aligning PSE operations with commercial principles to
improve accountability.
 Fiscal Space: Creating fiscal space for development projects through better public
resource management.
Sector-Specific Reforms
The program focused on improving specific sectors, particularly railways. The former finance
minister Ishaq Dar assured the ADB of efforts to enhance the performance of PSEs, especially in
the railway sector.
 Support-Dependent PSEs: Major PSEs like PIA, Pakistan Steel Mills, and power
distribution companies continue to depend on government support to sustain their
operations.

Conclusion
Despite significant loans from the ADB and government efforts, Pakistan's PSEs remain
burdened with rising debt. Political challenges and insufficient implementation of reforms have
hindered progress. Moving forward, effective privatization and robust governance reforms are
crucial for reducing the fiscal burden of PSEs and achieving sustainable economic growth.