Written by Hasan Mustafa Malik, GEI Associate
Pakistan's current debt burden has placed their economy in a very delicate situation. The government of Pakistan has borrowed almost $950 million from banks in the past one year. Pakistan is highly relying on it domestic debt which is adversely affecting the fiscal outlook of the country resulting in very little fiscal stability.
The country's government debt to GDP ratio is 64.30 as of December 2014. This figure is quite alarming because the government isn't doing much in terms of raising tax revenues to improve the fiscal outlook.
Pakistan's foreign debt is a mammoth $42 billion, even though this sum is a lot less than what some other nations owe, this is not an accurate perspective of the entire debt situation. That is because if some countries owe a lot of money to other nations, or if their foreign debt is much more than Pakistan, their financial position is still probably better than Pakistan due to the fact that they themselves have a lot of net creditors as well. However, Pakistan does not have many net creditors to claim a stable financial position instead they have been very close to defaulting. But emergency domestic loans have prevented this from happening.
For any developing nation, efficient debt management is required for sustainable economic growth. Pakistan's government severely needs to adopt this strategy. The nation's foreign debt has been increasing consistently over the past few years hampering the economy's progress in a big way.
There are various factors that are behind this debt crisis for Pakistan. Firstly, Pakistan has been quite politically unstable over the past few years. The country is a major victim of terrorism which plays a vital role in discouraging potential investors (domestic and international). This has had an adverse impact on the economy which forces the government to take loans in order to maintain stability. Also, the ever increasinging debt-to-GDP ratio isn't helping the stumbling nation's cause either. This is a result of a massive decline in tax revenue over the years. Corruption has played a huge role in this aspect as only a fraction of people pay their taxes. In Pakistan, corruption occurs at the highest of levels which has a negative impact on economic growth and other business operations.
Pakistan's fiscal deficit is increasing day by day due to a major energy crisis and growing security concerns that lead to high defense spending. As a result, this causes the foreign debt to further pile up. In order to improve the current economic outlook of the country, the government must both (1) cease their approach of excessive domestic borrowing and (2) reduce their dependence on loans from other countries.
A developing nation such as Pakistan, where more than 60% of the people live below the poverty line cannot withstand the effects of these debts as it further worsens standard of living and well being of Pakistani citizens.
To conclude, the ever rising burden of debt is one of the prime factors hampering the growth of Pakistan's economy. Until or unless the government of Pakistan doesn't take a few ambitious measures regarding debt, the nation's economy will stumble to further crisis.
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