Bankruptcy of ideas—III Borrowing to pay borrowing

In the first part of this series, it was argued that Pakistan increasingly finances the present by mortgaging the future

In the first part of this series, it was argued that Pakistan increasingly finances the present by mortgaging the future. The second part examined how recurring dependence on external lenders gradually narrowed policy space and transformed economic management into an exercise in compliance rather than transformation.

The next question is unavoidable. How did Pakistan become trapped in a cycle where every crisis appears to require another loan? The answer lies in a distinction rarely discussed in official documents. There is a fundamental difference between borrowing for development and borrowing for survival.

A farmer borrowing to install a tube-well, purchase better seeds or acquire agricultural machinery expects higher future income. The debt finances productive capacity. Repayment becomes easier because the investment generates additional output. A farmer borrowing from one lender merely to pay interest to another lender faces a very different reality. The debt does not create productive capacity. It postpones insolvency. Pakistan increasingly resembles the second case.

According to the Economic Survey 2025-26, public debt reached Rs 83.3 trillion by March 2026. Twenty years earlier, in 2006, public debt stood at about Rs 4.4 trillion. The increase itself is not the issue. Many successful economies borrowed heavily during phases of industrialisation and infrastructure expansion. South Korea, China and Singapore all used debt strategically to accelerate development.

The real question is what Pakistan obtained in return for this unprecedented accumulation of liabilities. Has debt financed a transformation in education, produced universal healthcare, modernised urban infrastructure, generated globally competitive industries and substantially raised labour productivity?

The evidence suggests otherwise. Pakistan’s social indicators remain weak compared to regional competitors. Public education continues to suffer from chronic underinvestment. Healthcare expenditure remains inadequate. Infrastructure deficits persist. Local governments remain financially constrained. Export performance remains disappointing relative to national potential.

The uncomfortable conclusion is that debt expanded far more rapidly than productive capacity. This reality becomes clearer when examining the composition of public expenditure.

The Economic Survey shows that interest payments during July-March FY2026 amounted to approximately Rs. 4.95 trillion. Budgeted mark-up payments for FY2026 exceed Rs 8.2 trillion. These figures dwarf spending on many sectors crucial for long-term development.

The implications are profound. Resources that could finance schools, hospitals, water systems, scientific research, technological innovation and infrastructure increasingly flow to debt servicing.

The state is compelled to prioritise yesterday’s obligations over tomorrow’s opportunities. Economists describe this phenomenon as crowding out. As debt servicing rises, fiscal space for development shrinks. When development shrinks, productivity growth weakens. When productivity weakens, economic growth slows. When growth slows, revenues underperform. When revenues underperform, governments borrow more. The cycle then begins again.

Pakistan’s fiscal history over the last two decades can largely be understood through this vicious circle. What makes the situation particularly troubling is the illusion of progress created by periodic stabilisation.

Every IMF programme aims to restore macroeconomic stability. Inflation moderates. Foreign exchange reserves improve. Fiscal deficits narrow. Primary surpluses emerge. These developments are important. But stability should not be confused with inclusive development.

A patient repeatedly transferred from intensive care to a recovery ward cannot be described as healthy merely because immediate danger has passed. Similarly, an economy cannot be considered transformed simply because default has been postponed.

The distinction between stabilisation and transformation is central to understanding Pakistan’s predicament. Successive governments have celebrated successful programme reviews while underlying structural weaknesses remained intact.

Productivity growth remained weak. Human capital formation remained inadequate. Export diversification remained limited. Taxation continued targeting documented sectors while significant economic rents escaped effective taxation. State-owned enterprises continued imposing burdens on public finances. Debt therefore continued growing even as periodic crises were temporarily contained.

This pattern explains why Pakistan repeatedly returns to external lenders despite decades of adjustment programmes. The country has become highly skilled at managing crises without addressing their causes. The result is a form of economic governance that may be described as debt management without development.

The tragedy is that Pakistan possesses enormous latent potential. A population exceeding 250 million, strategic geography, abundant agricultural resources, entrepreneurial talent and significant mineral wealth should provide foundations for sustained growth.Instead, increasing portions of public resources are absorbed by obligations arising from previous borrowing.

The issue is not merely financial. It is philosophical. A nation committed to long-term prosperity borrows to expand productive capacity. A nation trapped in short-term survival borrows to sustain existing commitments. The first path creates wealth. The second path creates dependence.

The Economic Survey 2025-26 demonstrates that Pakistan remains closer to the second path than the first. Breaking this cycle requires more than fiscal adjustment. It requires a new understanding of public finance.

Borrowing must be linked to measurable productivity gains. Debt should finance assets rather than consumption. Human development should be treated as investment rather than expenditure. Public policy should prioritise productive sectors capable of generating future repayment capacity. Without such a shift, every stabilisation programme will merely postpone the next crisis.

Pakistan’s challenge is not simply reducing debt but to double its GDP which is possible only through investment. The real challenge, thus, is ensuring that every rupee borrowed by State contributes to a future capable of repaying it.

The next part examines another consequence of debtocracy. As debt servicing expanded and fiscal pressures intensified, governments increasingly relied on taxation of already documented citizens through withholding taxes, advance taxes and indirect levies. The result was a system that extracts revenue without necessarily expanding prosperity—a model that may best be described as taxation without development.

[To be continued]
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