Pakistan’s economy has long grappled with the twin challenges of public debt and fiscal deficits, issues that have shaped its macroeconomic stability, growth prospects, and socio-economic outcomes. These challenges are not merely statistical anomalies but reflect deep structural weaknesses, policy missteps, and external pressures that have compounded over decades. This article provides an in-depth examination of Pakistan’s public debt and fiscal deficit dynamics, exploring their origins, evolution, implications, and potential pathways forward. By delving into historical trends, current realities, and future risks, we aim to offer a nuanced perspective that avoids oversimplification while critically assessing the establishment narrative.



 Setting the Context

Pakistan, a nation of over 230 million people, stands at a critical juncture in its economic history. Its public debt has soared to unprecedented levels, and fiscal deficits have remained stubbornly high, constraining the government’s ability to invest in development, reduce poverty, and achieve sustainable growth. As of 2025, Pakistan’s total public debt is estimated to hover around 90% of its Gross Domestic Product (GDP), with fiscal deficits averaging 6-8% of GDP in recent years. These figures are not just numbers—they encapsulate a cycle of borrowing, servicing debt, and cutting back on essential public investments, which has left the country vulnerable to both internal and external shocks.

The interplay between public debt and fiscal deficits is central to understanding Pakistan’s economic woes. A fiscal deficit occurs when government expenditures exceed revenues, necessitating borrowing to bridge the gap. Over time, this borrowing accumulates into public debt, which includes both domestic and external liabilities. In Pakistan’s case, the reliance on debt to finance deficits has created a vicious cycle, where rising debt servicing costs consume a significant portion of the budget, further widening the deficit and necessitating more borrowing. This article aims to unpack this cycle, examining its historical roots, structural drivers, and socio-economic consequences, while proposing pragmatic solutions grounded in Pakistan’s unique context.

2. Historical Evolution of Public Debt and Fiscal Deficit

To understand Pakistan’s current predicament, we must trace the historical trajectory of its public debt and fiscal deficits. Since its inception in 1947, Pakistan has faced fiscal challenges, but the magnitude and complexity of these issues have evolved over time.

2.1 Early Years (1947–1970s): Laying the Foundations

In the early decades, Pakistan’s fiscal policy was shaped by the need to build a new state amid limited resources. The government relied heavily on external assistance, particularly from the United States and multilateral institutions like the World Bank, to finance development projects and budgetary needs. Fiscal deficits during this period were moderate, averaging 3-4% of GDP, and public debt remained manageable, largely because of concessional loans and grants.

However, the seeds of fiscal indiscipline were sown during this period. The tax base was narrow, with agriculture—a significant contributor to GDP—largely untaxed due to political pressures from feudal elites. Revenue generation relied heavily on indirect taxes, which disproportionately burdened the poor. Meanwhile, expenditures were driven by defense needs, infrastructure development, and subsidies, setting a precedent for spending patterns that would persist.

2.2 The 1980s: Debt Accumulation and Structural Shifts

The 1980s marked a turning point, as Pakistan’s public debt began to grow rapidly. The Afghan War (1979–1989) brought significant foreign aid, particularly from the U.S., but also increased defense spending, which consumed a large share of the budget. Fiscal deficits climbed to 7% of GDP, driven by rising interest payments and non-development expenditures. The government’s reliance on domestic borrowing, particularly through non-bank sources, led to a surge in domestic debt, with the public debt-to-GDP ratio reaching 77.1% by 1988.

This period also saw a shift in financing strategies. To curb inflation, the government reduced borrowing from the central bank and turned to domestic non-bank borrowing, which required higher interest rates. This decision, while controlling inflation temporarily, increased debt servicing costs, which doubled as a percentage of GDP by the end of the decade. The foundations of Pakistan’s debt trap were thus laid, as borrowing became a structural feature of fiscal policy.

2.3 The 1990s: A Decade of Crisis

The 1990s were marked by economic stagnation and a severe debt crisis. Fiscal deficits remained high, averaging 6.8% of GDP, while public debt soared to 102% of GDP by 1998–99. External debt tripled to $30 billion by 1995, driven by balance-of-payments crises and declining remittances. The external debt-to-GDP ratio rose from 42% to 50%, and debt servicing consumed over 30% of export earnings.

Political instability, frequent changes in government, and weak economic management exacerbated the situation. Tax revenues stagnated at around 13% of GDP, while expenditures ballooned due to subsidies, defense spending, and interest payments. The imposition of U.S. sanctions following Pakistan’s nuclear tests in 1998 further restricted access to concessional financing, forcing the government to rely on expensive commercial loans. By the end of the decade, Pakistan was on the brink of default, a scenario averted only through emergency assistance from the International Monetary Fund (IMF).

2.4 The 2000s: Temporary Respite and New Challenges

The early 2000s offered a brief respite, as Pakistan benefited from debt rescheduling under the Paris Club and increased foreign aid following its role in the U.S.-led War on Terror. Fiscal deficits fell to 4.8% of GDP, and the public debt-to-GDP ratio declined to around 60% by 2005. The government introduced the Fiscal Responsibility and Debt Limitation Act (FRDLA) in 2005, aiming to cap deficits and reduce debt to 60% of GDP by 2012.

However, this progress was short-lived. The global financial crisis of 2008, coupled with domestic challenges like the 2010 floods and energy crises, reversed gains. Fiscal deficits climbed back to 6-7% of GDP, driven by power sector subsidies and security-related expenditures. Public debt rose to 87% of GDP by 2019–20, with external debt increasingly dominated by commercial loans and bilateral creditors, particularly China, under the China-Pakistan Economic Corridor (CPEC).

2.5 Recent Trends (2020–2025): A Deepening Crisis

The past five years have seen Pakistan’s debt and deficit challenges intensify. The COVID-19 pandemic strained public finances, necessitating increased borrowing to fund health and social protection programs. Fiscal deficits averaged 7.3% of GDP from 2019 to 2024, while public debt reached 91% of GDP in 2023. External debt stood at $131 billion by December 2023, with significant obligations to China, the IMF, and multilateral donors.

Debt servicing has emerged as a critical issue, consuming over 50% of federal tax revenues in recent years. In 2024–25, debt payments are projected to reach Rs. 8.3 trillion, equivalent to 6.9% of GDP. The reliance on domestic banks to finance deficits has grown, with government borrowing from banks jumping 116% between July 2023 and May 2024. This has crowded out private sector credit, stifling investment and growth.

3. Structural Drivers of Public Debt and Fiscal Deficits

Pakistan’s debt and deficit challenges are rooted in structural weaknesses that have persisted across decades. Understanding these drivers is essential for devising effective solutions.

3.1 Narrow Tax Base and Revenue Shortfalls

Pakistan’s tax-to-GDP ratio, averaging 11.8% in recent years, is among the lowest in the region. The tax system is plagued by a narrow base, with only 2-3% of the population paying income tax. Agriculture, which contributes 20% to GDP, remains largely untaxed, while the informal economy—estimated at 40% of GDP—escapes the tax net. Overreliance on regressive indirect taxes, which account for 60% of revenues, exacerbates inequality and limits revenue growth.

Weak tax administration, widespread exemptions, and evasion further constrain revenues. For instance, tax exemptions for politically connected sectors like real estate and retail cost the exchequer billions annually. The failure to tax wealth and property effectively has perpetuated a system where the burden falls disproportionately on salaried workers and consumers.

3.2 High Expenditure Pressures

Government expenditures have consistently outpaced revenues, driven by a combination of structural and discretionary factors. Key expenditure drivers include:

Debt Servicing: Interest payments on public debt consume over 40% of federal revenues, leaving little room for development spending. In 2024–25, interest payments are projected to rise by 64% year-on-year, reflecting higher interest rates and a growing debt stock.

Defense Spending: Pakistan’s geopolitical challenges necessitate significant defense allocations, which account for 15-20% of the budget. While critical for national security, this limits fiscal space for other priorities.

Subsidies and Losses of State-Owned Enterprises (SOEs): Subsidies, particularly in the power sector, have been a major drain, costing Rs. 1.1 trillion annually. Circular debt in the energy sector, driven by inefficiencies and capacity payments to independent power producers (IPPs), has exceeded Rs. 2.5 trillion. SOEs like Pakistan International Airlines and Pakistan Steel Mills continue to incur losses, requiring bailouts that widen deficits.

Devolved Responsibilities: The 18th Constitutional Amendment (2010) devolved significant responsibilities to provinces, but federal transfers—accounting for 60% of tax revenues—have strained the national budget. Provinces often fail to generate sufficient revenues, relying on federal support.

3.3 External Vulnerabilities

Pakistan’s external debt, constituting 40% of total public debt, exposes it to global economic shocks. The depreciation of the Pakistani rupee, which lost 50% of its value between 2018 and 2023, has inflated the cost of servicing foreign loans. Dependence on bilateral creditors like China, Saudi Arabia, and the UAE, as well as multilateral institutions like the IMF, has increased, with rollovers and refinancing becoming critical to avoid default.

The China-Pakistan Economic Corridor (CPEC), while transformative for infrastructure, has added to the debt burden. Capacity payments to CPEC-related power projects have contributed to circular debt, while repayments to Chinese lenders—$27 billion as of 2023—pose a significant challenge. Declining exports (revised to $28-29 billion in 2022–23 from a $36 billion target) and stagnant remittances have further strained foreign exchange reserves, limiting Pakistan’s ability to service external debt.

3.4 Political Economy and Governance

Fiscal indiscipline is deeply tied to Pakistan’s political economy. Successive governments have prioritized short-term populist measures—such as subsidies and tax amnesties—over structural reforms, fearing political backlash. Patronage-based politics has perpetuated inefficiencies, with SOEs and public sector jobs used to reward loyalists. Corruption and mismanagement have eroded public trust, discouraging tax compliance and investment.

Weak governance has also hampered fiscal consolidation efforts. The FRDLA, intended to enforce fiscal discipline, has been largely ignored, with deficit and debt targets routinely breached. Lack of coordination between federal and provincial governments has further complicated fiscal management, as provinces resist revenue-generating measures while demanding larger shares of federal funds.

4. Socio-Economic Implications

The persistence of high public debt and fiscal deficits has far-reaching consequences for Pakistan’s economy and society.

4.1 Economic Growth and Stability

Chronic deficits and rising debt have stifled economic growth, which averaged 3.29% in 2018–19 against a 6.2% target. The crowding out of private investment due to government borrowing has constrained job creation and industrial growth. High debt servicing costs have forced cuts in development spending, with public sector development programs slashed by 20% in 2023–24 to meet IMF targets. This has delayed critical infrastructure and social projects, perpetuating low productivity and competitiveness.

Inflation, driven by currency depreciation and deficit financing, has eroded purchasing power, with rates peaking at 38% in 2023. The IMF projects inflation to moderate to 6% in 2025, but rising demand and tax measures could reverse this trend. Macroeconomic instability, evidenced by dwindling foreign reserves ($4 billion in 2023, covering barely one month of imports), has heightened the risk of default, deterring foreign investment.

4.2 Poverty and Inequality

Pakistan’s fiscal challenges have exacerbated poverty and inequality. With over one-third of school-age children out of school and 40% of children stunted, underinvestment in human capital threatens long-term growth. High out-of-pocket health expenditures, driven by low public health financing (46% of total health spending), have pushed vulnerable households into poverty. The reliance on regressive taxes has worsened income disparities, as the poor bear a disproportionate burden.

Social safety nets like the Benazir Income Support Programme (BISP) have provided some relief, but their coverage remains limited. Budgetary constraints have restricted the expansion of such programs, leaving millions exposed to economic shocks. The failure to tax wealth and property has allowed elites to accumulate wealth, while the broader population struggles with rising costs and limited opportunities.

4.3 External Dependence and Sovereignty

Heavy reliance on external creditors has raised concerns about economic sovereignty. Conditions attached to IMF loans, such as tax hikes and subsidy cuts, have sparked public discontent, as they often disproportionately affect the poor. Bilateral creditors like China wield significant influence, with debt rollovers contingent on geopolitical alignment. The inability to generate sufficient export revenues or remittances has deepened dependence on foreign aid, limiting Pakistan’s policy autonomy.

5. Policy Responses and IMF Programs

Pakistan has repeatedly turned to the IMF for support, with 23 programs since 1958. The most recent, a $7 billion Extended Fund Facility (EFF) approved in September 2024, aims to reduce the fiscal deficit by 3% of GDP over three years, primarily through tax reforms. Key measures include:

Revenue Mobilization: Increasing the general sales tax to 18%, taxing agriculture and retail, and reducing exemptions.

Expenditure Rationalization: Cutting subsidies, privatizing SOEs, and devolving spending to provinces.

Debt Management: Securing rollovers from bilateral creditors and developing a domestic debt market.

While these measures have stabilized reserves and reduced inflationary pressures, they face significant challenges. Tax reforms have met resistance from powerful lobbies, and subsidy cuts have triggered protests. Privatization efforts, such as those for PIA, have been delayed by bureaucratic inertia and political opposition. Moreover, the focus on fiscal consolidation has squeezed development spending, raising questions about long-term growth.

6. Critical Assessment of the Establishment Narrative

The establishment narrative, propagated by government officials and multilateral institutions, often frames Pakistan’s debt and deficit issues as a result of external shocks (e.g., COVID-19, global commodity prices) and temporary mismanagement. This view emphasizes short-term stabilization through IMF programs and external financing, while downplaying structural flaws.

This narrative is incomplete and potentially misleading. External shocks have indeed exacerbated Pakistan’s challenges, but the roots lie in decades of policy failures—untaxed elites, inefficient SOEs, and overreliance on debt. The IMF’s one-size-fits-all approach, focusing on austerity and tax hikes, risks deepening inequality without addressing underlying issues like tax evasion and governance. The narrative also ignores the geopolitical dimension, where Pakistan’s strategic importance has enabled creditors to exert influence, often at the cost of domestic priorities.

A more honest assessment would acknowledge the political economy constraints and prioritize reforms that balance equity and growth. For instance, taxing agricultural income and wealth could broaden the tax base without burdening the poor, but this requires political will absent in the current discourse.

7. Pathways Forward: A Roadmap for Reform

Addressing Pakistan’s public debt and fiscal deficit requires a multi-pronged strategy that balances immediate stabilization with long-term structural reforms. Below are key recommendations:

7.1 Revenue Enhancement

Broaden the Tax Base: Tax agriculture, real estate, and retail sectors, which have historically evaded taxation. Introduce progressive wealth and property taxes to reduce inequality.

Strengthen Tax Administration: Invest in digital tools to curb evasion and improve compliance. Expand the tax net to include the informal economy through simplified registration and incentives.

Reduce Regressive Taxes: Shift reliance from indirect taxes to direct taxes, ensuring a fairer distribution of the tax burden.

7.2 Expenditure Rationalization

Prioritize Development Spending: Protect investments in education, health, and infrastructure, which yield long-term returns. Redirect savings from subsidy cuts to social safety nets.

Reform SOEs: Accelerate privatization of loss-making entities like PIA and restructure others to improve efficiency. Introduce performance-based incentives for SOE management.

Address Circular Debt: Renegotiate IPP contracts, promote renewable energy, and improve distribution efficiency to reduce power sector losses.

7.3 Debt Management

Diversify Financing: Develop a domestic debt market to reduce reliance on external borrowing. Issue long-term, low-yield bonds to stabilize debt servicing costs.

Debt Restructuring: Explore pre-emptive restructuring of external debt to extend maturities and lower interest rates, while engaging creditors transparently to avoid default.

Boost Exports and Remittances: Incentivize export diversification and formalize remittance channels to strengthen foreign exchange reserves.

7.4 Governance and Political Will

Enforce Fiscal Rules: Strengthen the FRDLA with binding targets and independent oversight to ensure fiscal discipline.

Improve Federal-Provincial Coordination: Align fiscal policies across levels of government, encouraging provinces to enhance own-source revenues.

Combat Corruption: Implement transparent procurement and accountability mechanisms to rebuild public trust and improve resource allocation.

7.5 Social Equity

Expand Social Protection: Scale up programs like BISP to shield vulnerable populations from austerity measures.

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Invest in Human Capital: Increase public spending on education and health to break the cycle of poverty and boost production 

8. Conclusion: A Call for Bold ActionPakistan’s public debt and fiscal deficit crisis is a formidable challenge, but not an insurmountable one. The country’s economic trajectory hinges on its ability to break free from the debt trap, broaden its revenue base, and prioritize inclusive growth. While external support from the IMF and bilateral creditors can provide temporary relief, lasting solutions lie in domestic reforms that address structural weaknesses and empower the economy.The path forward demands bold political leadership, public consensus, and a rejection of short-term populism. By taxing untapped sectors, rationalizing expenditures, and investing in human capital, Pakistan can reduce its debt burden and achieve fiscal sustainability. The stakes are high—failure to act risks deepening poverty, instability, and external dependence, while success could unlock Pakistan’s vast potential as a dynamic, resilient economy.This article has sought to provide a comprehensive, critical perspective on Pakistan’s fiscal challenges, avoiding jargon and oversimplification. The road ahead is complex, but with determination and strategic vision, Pakistan can chart a course toward prosperity and stability.