MANY would consider it alarmist to characterize a recent report as such, stating that the nation is on the verge of a “spiral” and “inevitable default.” However, Pakistan’s increasing debt load is unsustainable, as the advisory firm Tabadlab correctly points out when it compares it to a “raging fire.” Reduced economic growth and limited public spending on vital public services and development projects are already signs that this debt is having an impact. The nation has now fallen into a severe debt trap as a result of the failure of succeeding governments to enact reforms aimed at reducing the high budget deficit by increasing revenues and eliminating unnecessary spending. This has forced the government to take on more debt in order to make up the difference in funding and settle existing debt.It makes sense, given that total external and domestic loans and liabilities increased from $145.7 billion to $271 billion between 2011 and 2011, that Pakistan’s external debt has nearly doubled to $124.6 billion and its domestic debt has grown six-fold in nominal terms to $146.4 billion. This indicates that during the same period, per capita GDP decreased by 6%, from $1,295 to $1,224, while per capita debt increased by 36%, from $823 to $1,123. According to the report, Pakistan’s borrowing and spending patterns are unsustainable because the country has largely relied on debt accumulation to support an economy that is import-dependent and consumption-oriented, with little investment made in industry or productive sectors.As a result, interest payments as a percentage of GDP are at a record high.
The government must implement reforms to address Pakistan’s long-standing issues if it hopes to lower the country’s debt load and free up funds for demands related to social protection, health, education, and climate-related disasters and adaptation plans. An efficient, long-term management of the fiscal and current deficits must be at the top of the reform agenda in order to progressively close the financing gap and lower the need for borrowing as a new government prepares to take over a flagging economy. That objective cannot be met without implementing tax reforms that will increase the net tax and GDP ratio to at least 15-20% in the coming years, reduce wasteful spending, and privatize public sector companies that are losing money.Additionally, it is anticipated that the new arrangement will significantly enhance the business climate to draw FDI to export-related industries. When negotiations for a new loan from the IMF begin, the next government’s commitment to enacting reforms to control the enormous debt and stabilize the economy will be put to the test.