Drowning in Debt

For the political and military leadership of Pakistan, the only way forward is to agree on a singular agenda: a 10-year debt management roadmap.

By Amjad Ali | August 2023

Pakistan, a country with immense potential, is currently grappling with severe economic challenges. These challenges encompass a fiscal deficit, trade deficit, low tax collection, mounting debt burden, and liabilities, resulting in a surge in inflation, unemployment, and adverse impacts on the social fabric. The existing economic volatility has been exacerbated by the prevailing chaos, rendering the search for a solution seemingly elusive at present.

Unfortunately, the state of Pakistan’s economy can be likened to an Intensive Care Unit (ICU), where economic doctors are working tirelessly to revive the country’s economic health. However, as one symptom is treated, new life-threatening issues continue to emerge. While cures for these ailments exist, the lack of appropriate measures, administered by the competent individuals, further complicates the situation.

Here, the writer aims to adopt an unconventional approach to express his viewpoint on the subject. To comprehend its political economy, let’s consider Pakistan as a household with a few members, rather than a country. This household came into existence in 1947 and has been striving to achieve self-reliance ever since. Recently, the head of the family formulated the annual budget plan for the forthcoming fiscal year 2023-24. The figures presented in the budget appeared impressive, creating an illusion of possible prosperity for the household members.

According to the plan, the projected expenditure for the next fiscal year amounts to Rs14.5 trillion. This amount will primarily be sourced from direct taxes (Rs3.759 trillion), indirect taxes (Rs5.441 trillion), and non-tax revenue (Rs2.963 trillion). However, a significant portion of the expenditure of Rs7.303 trillion, will be allocated to debt servicing, as the household has been borrowing from various creditors. In addition to that, a sum of Rs1.804 trillion has been allocated for defence to safeguard the household.

Analysing this allocation, it becomes evident that a substantial portion of the budget, approximately Rs9.107 trillion out of Rs14.5 trillion, will be allocated towards interest payments to creditors and ensuring the household’s security in the face of external threats. In other words, after excluding defence expenditure and interest payments, only Rs5.4 trillion will be available for development.

To understand the current economic predicament and the underlying reasons behind the mess created by the previous government, it is essential to acknowledge that the post 9/11 circumstances brought about a significant shift in Pakistan’s socio-economic landscape. Subsequent events led to violence and destruction, resulting in unimaginable economic and human losses. During the Musharraf regime, the debt increased from Rs3.1 trillion to Rs6.1 trillion, a 100% increase over a five-year period. The PPP government, from 2008 to 2013, further escalated this debt, shattering previous records as it ballooned to Rs14.3 trillion, marking a 130% increase compared to the Musharraf’s era. The PML-N government and the PTI government inherited this substantial burden. Soon after assuming power, the PML-N government faced significant struggles in keeping the country afloat and fulfilling their obligations towards creditors. Similarly, the PTI government inherited a debt of Rs29 trillion and had to seek agreements with the IMF and friendly nations to sustain the country’s economy.

Pakistan finds itself trapped in a regressive debt cycle that seems insurmountable. Let us return to the analogy of the household to comprehend why the situation is unmanageable. Suppose the total valuation of this household is Rs100,000, and its annual income is Rs25,000. However, the annual expenditure amounts to Rs60,000. This leaves the household with two options: First, borrow more to meet the expenses or endure hardships. Thus, the head of the household opts to borrow more money to keep the household business afloat. Initially, friends and creditors willingly provided financial assistance, albeit with certain conditions attached.

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