- Examining the effects of growing public debt, currency depreciation, and reduced government spending on the working class
Pakistan’s total public debt, including domestic and external, as per the figures published by State Bank of Pakistan (SBP) stood at staggering PKR 71 trillion as on June 30, 2024, equivalent to 67% of its GDP. Alarmingly, 50% of the fiscal budget for the ongoing FY25 will be spent on the debt servicing/interest payments (Finance Ministry-2024), leaving less than 50% of resources available for health, education, defence, energy, agriculture, and public sector development programmes. On top of it, the country has recently entered the 25th IMF bail out programme of USD 7 billion (IMF-2024), which would further compound the debt servicing burden in the years to come. With foreign exchange reserves of USD 12 billion (SBP-2024), which barely covers three months of import cover, the country faces the daunting task to meet external debt obligations of USD 100 billion over the next four years (Express Tribune-2024).
The challenge is further exacerbated with the depreciation of PKR against the USD, which inflates the size of external debt in terms of USD and squeezes the share of government spending on developmental areas. The rising debt levels are triggering higher taxes, inflation and reduced government support, fuelling social discontent and straining the working class of the country.
Key considerations
In order to thoroughly dissect and analyse the debit crisis from multiple dimensions, it is essential to consider several critical aspects:
Debt profile: The composition of domestic and external debt in Pakistan’s debt profile is PKR 47 trillion (66%) and PKR 22 trillion (31%), respectively (SBP-2024). The domestic debt is predominantly concentrated in the issued long term government securities, with Pakistan Investment Bonds worth PKR 28 trillion, and short-term Market Treasury Bills worth PKR 11 trillion as of July 2024 (SBP-2024). On the other hand, the external debt is largely long-term and owed to multilateral creditors, bilateral creditors, and Paris Club. However, in the next few years, a considerable portion of the long-term debt will transition into short-term as maturities approach in the coming years. If sound measures to bolster foreign exchange are not taken now, the country would be seriously exposed to the heightened risk of default, which can could severely damage its credit ratings, erode investors confidence and tarnish its standing on the global stage.
Current account deficit: The country’s economy remains heavily reliant on imports, which nearly double the size of its exports. In the FY24, the country’s imports of goods and services were around USD 63 billion compared to its exports of USD 39 billion (SBP-2024). Although the current account deficit was narrowed by the sizeable amount of inward worker’s remittances of USD 30 billion during the year, but persistent current account deficit over the years has necessitated increased borrowing from foreign creditors, further depleting the foreign exchange reserves. Financing consumption and imports through borrowing is unsustainable and undermines the country’s long-term productive capacity. Meanwhile, administrative measures to curtail the size of imports have led to temporary current account surpluses, but at the cost of stifling forex liberalisation. This approach hampers long-term industrial growth, particularly SMEs, which are essential for economic expansion.
Fiscal deficit: Tax-to-GDP ratio of the country during FY24 stood close to 9% (Finance Ministry-2024), significantly lower than the Asia-pacific average of 19.3% (OECD-2024). For the ongoing FY25, the total estimated expenditure is around PKR 18.8 trillion, of which 55% will be financed through an estimated net tax revenue of PKR 10.3 trillion. The remaining 45% will be financed primarily through government borrowing from commercial banks (Finance Ministry-2024). In August 2024, commercial bank deposits in the country totalled PKR 30.8 trillion, while their lending to the government reached PKR 31 trillion, pushing their investment-to-deposit ratio to all time high exceeding 100% (Express Tribune-2024). The high yields offered by the government on debt securities have incentivised banks to lend more to the government rather than the private sector, which not only inflates the domestic debt but also squeezes the private sector credit growth in the country, creating a challenging business environment. With this trend of private sector credit growth, the ambitious economic growth targets become increasingly difficult. Although, FBR revenues grew by 23% year-on-year basis during July-November FY25, however, this is substantially lower than the required growth to achieve the annual tax collection target.
Exchange rate volatility: The adoption of market determined exchange rate regime by the country in July 2019 was a step in the right direction. However, with reserves of only USD 12 billion, the country struggles to sustain exchange rate fluctuations due to external and internal shocks including Covid-19, Ukraine-Russia War and ongoing political instability. The PKR has depreciated by more than 80% against USD since the change of Government in April 2022 (Disruption Banking-2024). The volatility has further been exacerbated by the smuggling of USD across the Pak-Afghan Chaman Border and the hoarding of USD by currency mafias. Based on the size of external debt, every 1 PKR depreciation against USD, increases the size of the country’s external debt by PKR 78 billion (Appendix A).
Social instability: In an effort to address the debt crisis, the government has resorted to raising taxes and borrowing more from both domestic and foreign lenders. This may fix things in the short-term, but at comes at a significant cost to the country. Higher taxes, escalating energy costs driven by circular debt and reduced government support and relief programs are eroding the purchasing power, pushing a large portion of the population closer to the poverty line in the years to come. The country is also grappling with growing civil unrest, fuelled by economic hardships and political instability since April 2022. This is contributing to the social discontent and resentment. Unfortunately, 2023 saw a record number of skilled workers migrating abroad (Junaid. A-2024), which is worrying trend for a country with a youth bulge with more than two third of the population aging below 30 years (Dawn-2024).
To effectively address the debt crisis, the following actions could help steer the country out of this economic malaise:
Debt restructuring: In the short-term, renegotiating domestic and external debt instruments with higher servicing cost could provide immediate relief by reducing interest rates and extending maturities. This would create fiscal space for the government to implement targeted subsidies to the vulnerable citizens, but this would require actors in the policy community to leverage their technical skills for proving feasibility, managerial expertise in executing negotiations, and political acumen in overcoming stakeholder resistance.
Broadening of tax base: In the medium to long-term, expanding the tax base is crucial. This can be achieved by enforcing stricter measures against taxes evaders and introducing taxes on high-value cash transactions and excess properties, so it impacts the wealthy and affluent. Rather than burdening the salaries class, sectors especially real estate, often unproductive, agriculture, which is accounts for close to one-fifth of the GDP but contributes only 1%, and the retail sector should be targeted.
Augment exports: In the long-term, a key strategy to build foreign exchange reserves and tackle the debt crisis to significantly boost exports. This can be achieved by subsiding value added and high value export products, as Vietnam and South Korea have successfully done. According to the ILO, Pakistan had an average labour productivity rate of 1.5 per cent from 2000 to 2020 annually, compared to India’s 5.7 per cent, Bangladesh’s 3.9 per cent, and China’s 8.5 per cent in the same period (Dawn-2024). To close this gap, the government should implement reforms to enhance labour productivity and facilitate the exporters.
Pakistan’s debt crisis is rapidly becoming unsustainable, with its roots spreading across all sectors of the economy. If not addressed as an urgent priority, the ramifications could be severe. Taking right steps in the right direction now are crucial to mitigate this crisis and secure economic prosperity.
Appendix
| Table 1: Impact of 1 PKR depreciation against USD on Pakistan’s External Debt | ||
|---|---|---|
| External Debt (USD in millions) |
External Debt (PKR in millions) |
|
| Exchange Rate 1 USD = PKR 278 |
78,147 | 21,724,866 |
| Exchange Rate 1 USD = PKR 279 |
78,147 | 21,803,013 |
| Increase in Debt by Depreciation of 1 PKR | – | 78,147 |
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