Indebted nation

Pakistan’s national debt has shot up to almost 75% of GDP in the latest finance ministry report on the subject. The number is significantly higher than the legally allowed limit of 57.5% of GDP — though this has been the case for several years — and will become a massive hurdle in attracting both foreign investment and assistance, and even the provision of government services. And in a move that seems intended to circumvent criticism, but really only attracts more, the government also decided to omit several unflattering details from the Debt Policy Statement, including information on gross financing needs, currency flows and other analyses and metrics.

Debt, in itself, is not a bad thing. Powerful economies such as the US, Japan and China all have total debt-to-GDP ratios of over 200%, but consumer and investor confidence in their economies is also ridiculously high, offsetting some of the negative impact of the debt. Still, the billions they spend on debt servicing could also be put to better use investing in the economy and citizen services.

Meanwhile, debt spending can imply economic mismanagement and have disastrous consequences when it is towards non-development expenditure, such as covering pension fund gaps, rather than education, health and infrastructure, which pay themselves off by stimulating economic growth. This is also why several developed countries try hard to limit debt — the pre-pandemic limit for much of the EU was around 60%, but income supplements and other emergency spending meant the entire region now exceeds this benchmark by some margin. Still, relative economic stability and the ability to borrow domestically means most of these countries can realistically meet their debt reduction goals now that the pandemic is over and the worst global economic impact of the War in Ukraine has been absorbed. Pakistan, on the other hand, has also seen foreign debt steadily creep up, and paying it off — or even reining it in — is impossible without corresponding GDP growth and improvements in the balance of trade.

Published in The Express Tribune, February 4^th, 2024.

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