Pakistan's Debt Crisis: Urgent Measures Needed for Economic Stability

Pakistan is currently grappling with a severe debt crisis, as its debt levels have surged in recent years, putting immense pressure on its financial stability. The country's fiscal deficit, averaging 7.3% of its economic output over the past five years, has resulted in a national debt of Rs78.9 trillion, comprising Rs43.4 trillion in domestic debt and Rs32.9 trillion in external loans.

This escalating debt burden has forced Pakistan into a cycle of borrowing to meet its existing obligations, leading to a sharp rise in annual debt repayments. Initially estimated at Rs7.3 trillion, debt servicing costs for the current fiscal year have now escalated to Rs8.3 trillion, constituting nearly 58% of the budgeted expenditure.

To tackle this crisis, the government must focus on increasing the tax-to-GDP ratio to international standards by taxing sectors that are currently undertaxed and cutting unnecessary expenses. Debt payments surged by over 64% to Rs4.2 trillion in the first half of the fiscal year, with soaring debt stock and domestic debt costs driven by record-high interest rates of 22% playing a significant role.

The mounting debt servicing costs, primarily due to elevated domestic interest rates, have had a profound impact on the economy, stifling new private investments and causing growth to stagnate. With almost 80% of the fiscal deficit being funded through commercial bank loans and limited official foreign inflows, domestic interest rates have emerged as a major concern.

It is imperative to reduce the fiscal deficit to sustainable levels to lessen the reliance on borrowing for budgetary needs and alleviate the increasing debt burden on Pakistan's economy.

Pakistan's debt crisis poses a significant challenge to its economic stability, necessitating urgent measures to address the escalating debt levels and mounting debt servicing costs. By implementing prudent fiscal policies, enhancing revenue generation, and curbing unnecessary expenditures, Pakistan can work towards achieving a more sustainable financial position and fostering long-term economic growth.