Misplaced debt optimism

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Pakistan's public debt burden remains a pressing issue that warrants careful consideration and proactive management. As the country grapples with economic challenges, the significant increase in public debt - reported at Rs74.103 trillion as of December 2024 -— raises concerns about sustainability and fiscal responsibility.

Although the government claims that indicators are improving and the risks associated with this debt are decreasing, its assessment is, at best, subjective. Pakistan's debt remains unsustainable; we have only taken a small step back from the cliff's edge.

The recent debt bulletin released by the Ministry of Finance indicates public debt grew by about 10% over the previous year, and even though the government points to a primary surplus and a stable exchange rate as reasons for the controlled rise in debt, we cannot overlook the fact that the debt burden continues increasing due to non-development spending and debt servicing, rather than expenditure in areas that will stimulate future economic returns that could one day help pay down the debt.

Furthermore, while the government has managed to finance the federal fiscal deficit almost entirely through domestic borrowing - primarily through the issuance of Pakistan Investment Bonds and Sukuks - reliance on domestic creditors can lead to a higher interest rate and crowding out of private investment. The average time to maturity for domestic debt has improved, suggesting more stability in the short term, but structural vulnerabilities within the economy remain.

Internationally, ratings agencies continue to regard Pakistan's debt as highly risky and within the 'junk' range, meaning that the country is dependent on favourable business, financial and economic conditions to meet its obligations. While conditions had been good in the preceding months, US President Donald Trump's trade wars have upended international markets and could spell disaster for us, given our high vulnerability to external shocks and dependence on the US as an export destination.