Pakistan’s Debt Dilemma: Navigating Turbulent Waters

By: Mian Muhammad Khalid Rehman

In the intricate fabric of Pakistan’s economic landscape, a daunting debt crisis casts a long shadow, threatening the nation’s quest for stability and prosperity. Recent revelations from key economic institutions, notably the State Bank of Pakistan, lay bare a disconcerting reality: Pakistan’s external debt has surged to a staggering $125.7 billion, placing immense strain on its fiscal health.

Central to Pakistan’s economic challenges lies its complex relationship with China and the China-Pakistan Economic Corridor (CPEC). Launched in 2013, CPEC stands as a monumental endeavor aimed at fortifying infrastructure and fostering economic growth. With over $60 billion invested primarily by China, it emerges as one of Pakistan’s largest infrastructure projects. However, the financing structure, heavily reliant on loans from China, poses significant challenges to fiscal sustainability.

The terms of Chinese loans, often characterized by high interest rates and short repayment periods, compound Pakistan’s debt burden and raise concerns about its long-term economic resilience. Analysts predict that Pakistan’s debt servicing obligations to China alone

could surpass $10 billion annually in the foreseeable future, exacerbating fiscal pressures.

Statistics underscore a notable concentration of CPEC investments in sectors like energy and transportation. For instance, approximately $33 billion has been allocated to energy projects, with an additional $11 billion earmarked for infrastructure and transportation development. Yet, questions arise regarding the alignment of these investments with broader developmental priorities such as education, healthcare, and agriculture, pivotal for sustainable long-term growth and human development.

Furthermore, the influx of Chinese workers and technical expertise associated with CPEC projects prompts discussions about local employment and skills transfer. Official estimates suggest that over 75,000 Chinese workers have participated in various CPEC ventures, sparking concerns about limited opportunities for local Pakistani laborers. The absence of robust mechanisms for skills transfer and training intensifies worries about the long-term implications for Pakistan’s labor market and human capital development.

A recent study by a US-based research center underscores the prevalence of loans in Chinese development financing in Pakistan, accentuating Islamabad’s vulnerability to global market fluctuations and reinforcing its dependence on Chinese goodwill.

Pakistan’s fiscal challenges stem from a myriad of systemic issues, chief among them being an inadequate tax base that undermines revenue generation. The tax-to-GDP ratio, hovering around 11%, falls significantly below regional averages, reflecting the country’s struggle to mobilize sufficient resources for its fiscal

needs. According to data from Pakistan’s Federal Board of Revenue (FBR), the tax-to-GDP ratio has remained relatively stagnant over the past few years, indicating persistent challenges in tax collection and compliance. Widespread tax evasion compounds the issue, with estimates suggesting that only 1.3% or a fraction of eligible taxpayers contribute to the national exchequer, exacerbating revenue constraints and hindering the government’s ability to fulfill financial obligations effectively.

Moreover, inefficiencies within state-owned enterprises (SOEs) amplify Pakistan’s debt burden, posing significant challenges to fiscal stability. Reports indicate that these entities collectively incur losses amounting to billions of dollars annually. For instance, data from the Ministry of Finance reveals that the cumulative losses incurred by SOEs reached Rs713 billion, including Rs263 billion in debt in the fiscal year 2022-2023 alone. These losses, attributed to corruption, mismanagement, and political interference, not only drain government resources through subsidies and bailouts but also stifle private sector growth and competition, further straining Pakistan’s fiscal position. The substantial financial burden imposed by SOEs underscores the urgent need for comprehensive reforms aimed at enhancing transparency, accountability, and operational efficiency to alleviate the burden on the government and foster sustainable economic growth.

Drawing parallels with countries like Spain and Argentina, Pakistan can glean valuable insights from their experiences in managing debt crises. Spain’s implementation of rigorous austerity measures and Argentina’s successful debt restructuring efforts offer

instructive lessons in navigating fiscal challenges through prudent policies and international cooperation. Addressing these internal challenges demands comprehensive economic reforms aimed at enhancing revenue generation, improving governance, and promoting fiscal discipline. Strengthening tax administration and enforcement mechanisms, broadening the tax base, and reducing exemptions and loopholes are critical steps toward bolstering Pakistan’s fiscal resilience. Additionally, restructuring underperforming SOEs, enhancing transparency, and fostering a conducive environment for private sector participation can alleviate the burden on the government

while stimulating sustainable economic growth. In the timeless words of Shakespeare’s “Hamlet,” “This above all: to thine own self be true.” Pakistan’s journey towards economic success demands unwavering resolve and prudent decision-making. As the nation navigates its debt crisis, drawing upon the lessons of history and embracing bold reforms can chart a course toward sustainable growth and resilience.

The author, an A-Level student at Aitchison College in Lahore, involved in the Economics Society is deeply interested in advocating for increased awareness about Pakistan’s deteriorating economy


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