Pakistan’s economy remains caught in a familiar cycle of crisis, bailout, temporary stabilisation and renewed strain. Since 1958, the country has entered more than 20 IMF programmes, making external rescue a recurring feature of economic management rather than a path to lasting recovery.
DEBT MANAGEMENT
Pakistan’s economy remains caught in a familiar cycle of crisis, bailout, temporary stabilisation and renewed strain. Since 1958, the country has entered more than 20 IMF programmes, making external rescue a recurring feature of economic management rather than a path to lasting recovery.
This pattern is again visible in the IMF’s End-of-Mission Statement of March 2026, which places fiscal consolidation, tight monetary policy, energy-sector reform, and external financing pressures at the centre of current discussions, while also highlighting the added risks posed by Middle East tensions, rising energy prices and tighter global financial conditions. Together, these pressures reveal a deeper weakness: Pakistan’s problem is not simply the lack of financing, but its repeated failure to translate short-term stabilization into durable structural change.
The roots of this dependence stretch back several decades. Pakistan became heavily indebted in the 1970s after borrowing to absorb the shock of rising oil prices, setting in motion a long reliance on external loans. Over much of the last 44 years, the country remained under IMF lending arrangements, while external government debt payments between 1990 and 2016 averaged 16 per cent of total government revenue, exceeding spending on health, and external debt had reached $59 billion by 2016. Debt pressures were further intensified by the 2010 floods, the aftereffects of the global financial crisis, and the rising cost of imported oil.
Beyond the IMF, the debt burden was also shaped by broader donor and bilateral financing, including support from the World Bank, Asian Development Bank and the Japanese government, such as the more than $500 million National Drainage Program between 1998 and 2005. That long-standing dependence is now colliding with a worsening domestic debt burden. Central government debt rose to Rs79.32 trillion in January 2026, up from Rs72.12 trillion a year earlier, an increase of Rs7.2 trillion, or about 10 per cent.
More concerning is the composition of this rise: domestic borrowing now accounts for around 71 per cent of total debt. Domestic debt alone reached Rs55.98 trillion, with Pakistan Investment Bonds remaining the largest component, while short-term borrowing stayed elevated at Rs8.78 trillion, pointing to persistent refinancing pressure. Although external debt increased less sharply, it still stood at Rs23.34 trillion, thereby adding to repayment stress and overall vulnerability.
At the same time, immediate external obligations are again forcing Pakistan to look outward for support. Pressure on foreign exchange reserves has intensified ahead of repayments of about $3.5 billion to the UAE, while the country is also depending on support and rollover arrangements from partners such as China and Saudi Arabia. Total liquid foreign reserves stood at $21.789 billion as of March 27, 2026, including $16.381 billion held by the State Bank of Pakistan and $5.407 billion by commercial banks.
Yet the scale of future needs remains heavy, with gross external financing requirements projected at $19.398 billion for fiscal year 2025–26 and $19.123 billion for 2026–27. Although the programme remains financed for the next 12 months through bilateral and multilateral commitments, including expected support from the Saudi Development Fund, China EXIM Bank and the rollover of short-term liabilities by key partners, the broader picture remains unchanged: Pakistan is still relying on external lifelines to manage immediate pressures rather than breaking the cycle through stronger exports, deeper revenue mobilization, and sustained structural reform.
Pakistan’s debt crisis is not just a problem of repeated borrowing but a deeper cycle of unresolved structural weaknesses, flimsy revenue mobilisation, rising debt servicing, fragile growth and poor allocation of borrowed funds, which breeds economic instability.
One of the most important questions of every Pakistani is: ‘If Pakistan keeps lending from donors, where does the money go, and why do macroeconomic conditions remain weak instead of improving?’ This concern is valid because, despite repeated borrowing, the economy continues to decline, experience instability and face mounting pressure. Pakistan’s debt problem has become deeply tied to weak revenue growth, rising debt-servicing costs, repeated borrowing, and an unsustainable fiscal structure.
According to the IMF's 2023 report, Pakistan’s debt-to-GDP ratio stood at about 75 per cent in 2022, well above the 58 per cent legal limit, while external debt reached $125.7 billion in March 2023, indicating that the debt burden has moved beyond manageable levels. The situation is further worsened by the fact that the expected revenue of Rs8.6-9.2 trillion for 2023–24 was being largely absorbed by more than Rs7.3 trillion in debt servicing, leaving very little fiscal room for development and welfare spending. At the same time, the government was borrowing at an average rate of Rs41 billion per day, while budget deficits remained high and new loans were partly being used to repay older obligations, further deepening the debt trap.
More than 80 per cent of bank lending is directed towards the government, thereby reducing the space for productive private investment and weakening broader economic activity. In addition, Pakistan’s tax structure relies heavily on indirect and withholding taxes, a pattern that can increase inflation, raise business costs, reduce purchasing power, and worsen inequality. In essence, Pakistan continues to face debt crises because borrowing has been used as a short-term response to fiscal stress, while the deeper structural problems, such as narrow revenue mobilisation, high debt servicing, weak growth and an unsustainable economic framework, remain unresolved.
Pakistan needs a shift from crisis-driven borrowing to disciplined, growth-oriented debt management. Borrowed funds should be directed only towards high-return, revenue-generating sectors such as energy, export industries, infrastructure, technology and human capital, so that debt builds repayment capacity rather than adding to fiscal stress. At the same time, stronger financial management, transparent tracking of loan use and strict project monitoring are essential to reduce waste, leakage and weak implementation.
The government must also move from reactive borrowing to a planned debt strategy aligned with long-term national priorities, while broadening the tax base, improving revenue collection, and reducing reliance on indirect taxes, so that fiscal deficits can be managed through stronger domestic resources rather than continuous borrowing. Cutting unproductive expenditure and untargeted subsidies would create more room for development spending, while export growth and economic diversification would ease pressure on reserves and reduce dependence on external financing.
Alongside this, stronger institutional coordination, especially in debt planning and public finance management, is necessary to make policy more consistent and sustainable. Any adjustment process must also protect poor and vulnerable households through targeted social safety nets, so that reform does not deepen inequality. And if restructuring becomes necessary, it should be handled transparently, with clear treatment of all major creditors and within a credible reform framework. In essence, Pakistan’s way forward lies not in more borrowing alone, but in using debt productively.
The writer is a research associate at the Sustainable Development Policy Institute (SDPI), Islamabad.
