Indebted nation

Every Pakistani now carries a public debt burden of approximately Rs333,000 — a figure that is rising by the minute and threatens to eclipse total GDP in a few years if corrective measures are not taken soon. Total debt is now Rs80.5 trillion, or nearly 71% of GDP, largely due to continued deficit spending and lacklustre growth. It is also important to remember that deficit spending itself is not a problem if the economy is growing, because a booming economy with small budget deficits will actually lead to a decline in the ratio of public debt to GDP.

Unfortunately, growth has been almost stagnant for several years, and even now, while projections are respectable at about 3.5%, the budget deficit is still 6.2% of GDP, partly because tax receipts are not growing fast enough to compensate for the deficit, which is itself largely due to debt financing. For a growth-based model to work, we would need consistently high growth rates for several years, such as during the growth miracles of several East and Southeast Asian countries.

South Korea, for example, saw growth exceed 6% in 34 of the 35 years between 1963 and 1997, often exceeding 10%, according to World Bank data. China exceeded 6% growth in 40 out of 43 years between 1977 and 2019. Pakistan, on the other hand, has seen growth exceed 5% just once since 1977 — even that was the post-Covid recovery year in 2021.

Meanwhile, deficits are consistently higher than legally permissible limits, but with no enforcement mechanism, every federal government just ignores these budget rules, preferring to only act on the demands of the IMF and other lenders. The end result has been a race to the bottom, with critical development spending frozen or cut to cover debt-financing costs, as revenue increases are not keeping pace with debt growth. Though the trend has been broken recently with a primary budget surplus, one good quarter, or even one year, cannot fix years of damage. True stability will require moving beyond crisis management to address foundational weaknesses, including broadening the tax base to increase revenue and sustainable economic growth.