Daily Times

Pakistan’s economic struggles in 2024 can be best understood through its growing dependence on foreign loans. By September 2024, the country’s external debt had reached over $130 billion, sparking concerns that the nation is spiralling toward a debt trap rather than leveraging these funds for sustainable development. The fiscal challenges are immense, and the pressure to manage debt obligations is mounting at a time when Pakistan’s broader economic indicators-GDP growth, inflation, export performance-are far from ideal. The country’s reliance on foreign loans has moved beyond development projects and into the realm of financing basic budgetary requirements, including debt servicing, which raises fundamental questions about the long-term sustainability of this strategy.

The numbers paint a stark picture. With a debt-to-GDP ratio now exceeding 80%, Pakistan is among the most indebted countries in the region. By the third quarter of 2024, Pakistan’s total external debt and liabilities had increased by over 20% in just two years. The budget for 2024-2025 reflects this reality, with nearly 45% of government revenues allocated to servicing existing debt.

Pakistan’s relationship with the IMF has been a defining feature of its fiscal policy. Since the 1950s, Pakistan has entered into more than 20 IMF programs. The latest of these, signed in 2023, provided Pakistan with a $3 billion loan to help stabilize its balance of payments. However, this relief came at a high cost. The conditions imposed by the IMF require Pakistan to implement painful reforms that have exacerbated the economic burden on everyday citizens. Inflation in Pakistan remains stubbornly high, with consumer prices having surged by over 30% in 2023, and inflation hovering around 29.5% by September 2024. For many Pakistanis, the IMF program represents a temporary fix that solves short-term fiscal crises at the expense of long-term economic growth and public welfare.

Pakistan’s relationship with the IMF has been a defining feature of its fiscal policy.

One of the immediate consequences of Pakistan’s foreign borrowing is the depreciation of the Pakistani rupee. The currency has been under relentless pressure throughout 2024, losing more than 15% of its value against the US dollar in just the first nine months of the year. The more the country borrows, the greater the demand for foreign currency to service these debts, pushing the rupee further downward. The implications are severe. A weaker rupee makes it more expensive for Pakistan to import goods, including essential commodities such as oil, food, and machinery. This contributes to rising inflation and puts additional strain on the government’s ability to manage its foreign reserves, which remain critically low-at around $8 billion by September 2024, barely enough to cover two months of imports. For a country with such large external debt obligations, maintaining an adequate level of reserves is essential to avoid defaulting on loans. Yet, the continuous devaluation of the rupee is making it increasingly difficult to manage these reserves effectively.

Pakistan’s debt situation is not unique in the region, but it is more precarious than most of its neighbours. Bangladesh, for instance, has managed its debt far more effectively, with a debt-to-GDP ratio of just over 40%.

Sri Lanka offers a more alarming comparison. In 2022, the country defaulted on its foreign debt after years of excessive borrowing to finance infrastructure projects that failed to deliver economic returns. This led to a full-blown economic crisis, with severe shortages of essential goods, widespread social unrest, and political instability. Pakistan is not yet at the point of default, but the risk is growing. Much of the country’s recent borrowing has been tied to large-scale infrastructure projects under the China-Pakistan Economic Corridor (CPEC), a cornerstone of China’s Belt and Road Initiative (BRI). While CPEC has brought significant investment into Pakistan, it has also increased the country’s debt burden. Loans from China now account for a large portion of Pakistan’s total external debt, raising concerns about whether the country can afford to repay these loans if the economic benefits of CPEC projects do not materialize as quickly as anticipated. Many of these projects, including road networks, power plants, and industrial zones, have faced delays and cost overruns, further straining the country’s financial resources.

Tax revenue is another key area where Pakistan has struggled to generate the resources needed to manage its debt. As of 2024, Pakistan’s tax-to-GDP ratio stands at just over 10%, one of the lowest in the world. The government has made repeated efforts to reform the tax system, but these reforms have often been half-hearted and poorly enforced. Large segments of the economy, including agriculture and the informal sector, remain largely untaxed. Moreover, tax evasion is rampant, and powerful interest groups have consistently resisted attempts to broaden the tax base. By contrast, countries like India and Bangladesh have been able to maintain higher tax-to-GDP ratios, which provide them with the fiscal space needed to invest in public services and infrastructure without relying as heavily on foreign borrowing.

So, what can Pakistan do to break free from this cycle of borrowing? The solutions are well known, but implementing them has proved politically and economically challenging. One of the most important steps is to boost exports. Pakistan’s export sector has significant potential, particularly in textiles, agriculture, and information technology, but these industries require substantial investment and reform. The government must focus on modernizing factories, improving energy supplies, and creating policies that incentivize export growth. Additionally, Pakistan must diversify its export base. Relying solely on textiles has limited the country’s ability to compete in global markets. Sectors such as agriculture, which have been neglected for years, could play a larger role in driving export growth if the right policies are put in place.

Improving tax collection is another crucial step. Without increasing domestic revenue, Pakistan will remain dependent on foreign loans to finance even its most basic needs. It’s not just about imposing new taxes-it’s about ensuring that the existing tax system works more efficiently and fairly. Expanding the tax base will provide the government with the fiscal space it needs to invest in long-term development projects and reduce its reliance on foreign borrowing.

Moreover, Pakistan needs to be far more strategic about how it borrows. Not all debt is bad, but borrowing should be tied to projects that generate economic returns capable of repaying the loan. Too often, Pakistan has borrowed to fund projects that have little impact on the country’s broader economic growth. Infrastructure development is crucial, but the returns on these projects must be measured in terms of their contribution to the broader economy. Otherwise, Pakistan risks falling into the same trap as Sri Lanka. Lastly, Pakistan must engage in transparent debt management. The terms of its loans, particularly those from China under CPEC, should be made public. Pakistan should also explore the possibility of renegotiating some of its debt. Other countries have successfully negotiated better terms with China, and there is no reason Pakistan should not pursue similar options if the economic situation worsens.

2024 is nearing its end and the challenges Pakistan faces are both immediate and long-term. Without fundamental reforms, Pakistan will remain trapped in a cycle of borrowing that will only become more difficult to escape.

Mr. Jawad Saleem is a financial expert and can be reached on
Email: jawadsaleem.1982@gmail.com

Twitter: JawadSaleem1982

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