In recent years, Pakistan has been grappling with a significant economic challenge – its gross public debt has been on the rise, outpacing the growth of its gross domestic product (GDP). As of fiscal year 2022-23 (FY23), Pakistan’s gross public debt has reached a staggering Rs. 62.9 trillion, which accounts for 74.3 percent of its GDP. This is a remarkable increase from the relatively modest debt of Rs. 3.7 trillion, which was 56.1 percent of GDP, just two decades ago in FY23. In this article, we will delve into the factors contributing to this surge in public debt, its implications, and what the future may hold for Pakistan’s economy.
Understanding the Debt Surge
To comprehend the gravity of Pakistan’s debt situation, we must first look back at the past 20 years. During this period, Pakistan’s domestic debt has experienced an astounding compounded annual growth rate (CAGR) of 16.3 percent, surging to Rs. 38.8 trillion. Simultaneously, the country’s external debt has increased by a CAGR of 13.8 percent, further exacerbating the debt crisis.
While Pakistan’s economy has undeniably expanded over the last two decades, reaching Rs. 84.7 trillion in FY23, compared to a mere Rs. 6.6 trillion in the year 2003, it has done so at a relatively modest CAGR of 13.6 percent. This modest growth rate has been overshadowed by the rapid escalation of public debt.
Recent Debt Surge
Out of the colossal total debt increase of Rs. 59.2 trillion over the last 20 years, an alarming Rs. 37.9 trillion increase has occurred in just the past five years. This recent spike in debt warrants a closer examination.\
Factors Driving the Debt Increase
Pakistan has faced a myriad of economic challenges, including fiscal deficits, trade imbalances, and inflationary pressures. These challenges have necessitated borrowing to meet the budgetary needs and infrastructure development.
Borrowing for Development
A substantial portion of Pakistan’s debt has been allocated for development projects, such as infrastructure, energy, and education. While these investments hold long-term promise, they have also added to the growing debt burden.
The rising debt has also led to increased interest payments, diverting a significant portion of the budget towards servicing the debt. This limits the government’s capacity to invest in critical areas like healthcare and education.
Implications and Concerns
The sustainability of Pakistan’s debt has become a subject of concern. The rapid growth of debt, especially in recent years, has raised questions about the country’s ability to service its obligations without compromising essential public services.
A ballooning debt could adversely affect Pakistan’s creditworthiness in international markets, making it more expensive for the country to access financing and potentially leading to downgrades by credit rating agencies.
The debt burden could hamper economic growth in the long run, as an increasing portion of the budget is allocated to debt servicing rather than investments that promote economic expansion.
The Way Forward
To address the debt crisis, Pakistan must exercise fiscal responsibility. This involves reducing budget deficits, implementing measures to enhance revenue collection, and rationalizing government spending.
Investment in Productivity
The government should prioritize investments that boost productivity and economic growth. This includes infrastructure projects that have a high return on investment.
Effective debt management strategies, including renegotiating terms with creditors and exploring alternative financing options, can help mitigate the impact of the debt burden.