A recent analysis by Tabadlab, a think tank based in Islamabad, presents a grim outlook on Pakistan’s economic condition, characterizing its debt situation as an “intense blaze” and significantly more severe than the International Monetary Fund’s evaluation of being “close to” manageable.

With debt levels reaching alarming highs, Pakistan faces the grim prospect of an “inevitable default,” which could trigger a devastating economic spiral.

Driving the news

Amidst growing worries about Pakistan‘s ability to sustain its debt, there’s a backdrop of economic gloom among voters, as indicated by a recent Gallup poll and a contentious election.

This uncertainty has already had a detrimental effect on the country’s stock market. Shehbaz Sharif, a potential candidate for prime minister, has stressed the immediate need for a new IMF bailout to prevent a crisis.

How the debt has grown over the years

  • Pakistan’s per capita debt increased by 36% from $823 in 2011 to $1,122 in 2023.
  • During the same timeframe, Pakistan’s GDP per capita saw a 6% decline from $1,295 in 2011 to $1,223 in 2023.
  • The disparity between the growth rates of debt and income in Pakistan indicates a widening financing gap, leading to the need for additional borrowing.
  • A comparative illustration shows that a newborn in 2011 inherited a debt of PKR 70,778, while a newborn in 2023 bears a debt of PKR 321,341, marking a 4.5 times increase.

Why it matters

  • Since 2011, Pakistan’s external debt has nearly doubled, while its domestic debt has increased sixfold.
  • For FY-2024, Pakistan faces an estimated debt maturity of USD 49.5 billion, with 30% as interest payments, excluding bilateral or IMF loans.
  • The majority of debt accumulation has supported a consumption-driven and import-heavy economy, lacking investment in productive sectors or industry.
  • Pakistan’s debt profile is considered alarming due to unsustainable borrowing and spending patterns.
  • The growing population intensifies the need for increased funding in social protection, health, education, and strategies for climate change adaptation and the green transition.
  • The intertwined challenges of climate vulnerability and debt in Pakistan present an opportunity for simultaneous mitigation and synergy.
  • “Pakistan’s debt is a formidable, existential, and pertinent challenge, that requires immediate and strategic interventions. Debt repayments are at a historic high, deprioritising the needs of a growing population, such as social protection, education, health, and crucially, climate change,” the report said.

Severity of the debt burden

According to the Tabadlab report, written by Zeeshan Salahuddin and Ammar Habib Khan, Pakistan’s external and domestic debt have seen a significant increase since 2011. External debt and liabilities have nearly doubled to reach $125 billion, while domestic debt has surged sixfold. Interest payments now constitute a larger portion of the GDP than ever before, highlighting the seriousness of the debt load.

The think tank suggests innovative solutions like debt-for-nature swaps to alleviate the debt crisis while addressing environmental conservation needs. Pakistan, prone to climate disasters, requires substantial financial resources for recovery and adaptation, making the intersection of debt and climate change a critical area for intervention.

What’s next for Pakistan

Tabadlab’s analysis indicates that without transformative change and comprehensive reforms, Pakistan’s debt crisis will only worsen.

“It demands transformational change. Unless there are sweeping reforms and dramatic changes to the status quo, Pakistan will continue to sink deeper, headed towards an inevitable default, which would be the start of the spiral,” the Tabadlab report said.

Rising debt levels are hampering economic growth, as they emphasize consumption over productive investment. With the nation teetering on the edge of default, it’s crucial to implement strategic measures to prevent a complete economic catastrophe.

(With TOI inputs)

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