Debtocracy & bankruptcy of ideas   

Pakistan’s debt problem has entered a new phase. The headline figure is alarming: total debt and liabilities reached Rs. 99.59 trillion by the end of fiscal year (FY) 2025-26. The deeper concern, however, lies in the composition of this debt, the burden of servicing it and the channels through which public borrowing now affects every productive sector of the economy.

According to the latest State Bank of Pakistan data, total debt stood at Rs. 97.88 trillion. Gross government domestic debt reached Rs. 59.44 trillion, while external debt amounted to Rs. 36.20 trillion. Central government debt increased by 7.39% over the preceding year to Rs. 83.64 trillion. External debt and liabilities stood at US$138.85 billion.

These numbers confirm the central argument developed in the a ten-part series published in these columns [‘Bankruptcy of ideas—X: Debt, Taxes & Democracy’, Minute Mirror, June 21, 2026]. Pakistan has not merely borrowed against its future. It has increasingly borrowed to service earlier borrowing, while failing to create sufficient productive capacity from the accumulated debt.

‏The external debt-servicing profile for FY2026 makes this particularly clear. Pakistan serviced US$21.59 billion of external debt during the year. An extraordinary US$10.14 billion—nearly half of the annual amount—fell in the final quarter alone. Quarterly servicing was 2.63 times the amount paid in the preceding quarter, mainly because principal repayments jumped from US$2.70 billion in the third quarter to US$8.81 billion in the fourth.

This concentration of repayments is as important as the overall debt stock. A country may carry a large debt if its economy generates sufficient revenue, exports and foreign exchange to service it. Pakistan’s difficulty is that debt obligations have expanded much faster than the productive and export capacities needed to meet them.

The debt accumulated over decades cannot be attributed to one government or one fiscal year. Persistent fiscal deficits, a narrow and inequitable tax base, losses of state-owned enterprises, the energy-sector circular debt, excessive recurrent expenditure, exchange-rate depreciation and repeated balance-of-payments crises have all contributed to it. Borrowing became the preferred substitute for reform. 

Governments borrowed because they could not tax influential sectors, restructure loss-making enterprises, reduce wasteful expenditure or build a competitive export economy. External lenders financed temporary stability, while domestic banks financed the fiscal deficit. Each arrangement postponed difficult decisions without removing the causes of the crisis.

The Ministry of Finance reported public debt at 70.7% of GDP by June 2025. The ratio may improve when nominal GDP grows faster than debt, especially during periods of inflation, fiscal consolidation and lower interest rates. A declining debt-to-GDP ratio, however, does not necessarily mean that the debt burden has become harmless.

Pakistan’s debt stock is still increasing. What has improved is the immediate cost of servicing parts of it.

Total debt and liabilities servicing declined from Rs. 13.16 trillion in FY2025 to Rs. 11.97 trillion in FY2026. Interest payments on debt fell by more than 23%, from Rs. 9.47 trillion to Rs. 7.27 trillion, largely because lower policy rates reduced the cost of servicing domestic government debt. Interest payments on gross government domestic debt consequently fell from Rs. 8.08 trillion to Rs5.99 trillion. This is welcome relief. It should not be presented as the end of the debt crisis.

Lower interest rates reduce the flow cost of debt; they do not extinguish the stock. Principal repayments on external debt and liabilities increased from Rs. 3.47 trillion to Rs. 4.47 trillion during FY2026. Pakistan therefore obtained relief on domestic interest payments while facing a substantially heavier external repayment burden.

The distinction is between debt management and economic transformation. Pakistan may be moving from an acute debt-accumulation crisis towards a more manageable financing position. It has not escaped debtocracy—the system in which fiscal policy, taxation, banking, foreign relations and development priorities become subordinate to the requirements of borrowing and repayment.

Debtocracy does not remain confined to the accounts of the Ministry of Finance. It is transmitted throughout the economy. The first channel is the banking system. Government securities offer banks sovereign backing, liquidity and attractive risk-adjusted returns. Lending to the government is easier than evaluating businesses, financing innovation or supporting small and medium enterprises. A large domestic borrowing requirement therefore creates continuous competition for available liquidity.

The result is crowding out. The State obtains the funds it requires, banks earn relatively secure returns and the private sector bears the adjustment. Productive businesses face limited access to credit, higher risk premiums and shorter financing horizons. Smaller enterprises suffer the most because they cannot compete with the sovereign for bank liquidity.

This creates a financial system that can remain profitable while the productive economy remains weak. Deposits are mobilised from citizens and businesses, channelled into government securities, and then used substantially to meet recurrent expenditure and service earlier debt. Banking expands without an equivalent expansion in productive capacity.

The second channel operates through foreign exchange. External debt repayment creates demand for dollars. That demand places pressure on reserves and the current account. Any resulting exchange-rate depreciation increases the rupee value of external liabilities and raises the domestic price of imported fuel, machinery, raw materials and intermediate goods. 

The chain is direct: External repayment creates foreign-exchange demand; reserve pressure increases exchange-rate sensitivity; depreciation generates imported inflation; and inflation raises working-capital requirements and production costs.

Debt consequently becomes a corporate balance-sheet issue. An industrial enterprise may have no external loan, yet still bear the effects of sovereign external debt through a weaker rupee, costlier imports, higher energy prices and restricted access to domestic credit. Consumers ultimately pay through inflation, reduced employment and lower real incomes.

The third channel is fiscal. Every rupee allocated to debt servicing is a rupee unavailable for education, health, water, climate resilience and productive infrastructure—unless the State raises additional revenue or borrows again. Pakistan then enters a circular arrangement: borrowing creates servicing obligations, servicing compresses development expenditure, weak development limits growth and revenue, and insufficient revenue necessitates further borrowing.

This is why a primary surplus, though necessary, is not sufficient. It can stabilise debt dynamics, but it cannot by itself transform the economy. Stability becomes sustainable only when fiscal consolidation is accompanied by higher productivity, diversified exports, improved human capital and greater domestic revenue raised according to the ability-to-pay principle.

The relevant question is not whether Pakistan can continue borrowing. It probably can, provided external refinancing remains available, nominal GDP growth exceeds the effective cost of debt and the government maintains sufficient fiscal discipline.

The real question is what the borrowing finances. Debt used for efficient infrastructure, export capacity, energy security, technological development and human capital can enlarge the economy’s repayment capacity. Debt used to finance current consumption, untargeted privileges, inefficient enterprises and recurring fiscal gaps merely transfers the cost of present political choices to future taxpayers.

Pakistan therefore needs a binding distinction between productive and unproductive borrowing. Every major loan should identify the asset or capacity it will create, its expected economic return, its foreign-exchange implications and the source from which it will ultimately be repaid. Parliament and the public should be able to examine these claims before liabilities are contracted, not after the money has been spent.

Domestic borrowing must also be linked to financial-sector reform. Banks cannot remain primarily intermediaries between depositors and the government. Regulatory and fiscal incentives should encourage longer-term lending to agriculture, industry, technology, exports and small enterprises without compromising credit discipline.

External borrowing requires an even stricter test. Foreign-currency debt should preferably finance activities capable of earning or saving foreign exchange. Borrowing dollars to meet rupee-based recurrent expenditure is one of the surest ways of converting a fiscal weakness into a balance-of-payments crisis.

The decline in interest payments during FY2026 provides breathing space. It does not provide an escape. That space can either be used to restructure the economy or consumed until the next interest-rate, exchange-rate or refinancing shock arrives.

Pakistan will emerge from debtocracy only when borrowing ceases to substitute for taxation, governance and productive investment. The Rs.100 trillion headline is not merely a record of what Pakistan owes. It is a measure of opportunities already consumed and a warning about choices still to be made.

Debt becomes manageable when it creates the capacity to repay itself. Without that transformation, improved ratios and lower interest payments will amount to another interval of stabilisation—while the underlying bankruptcy of ideas continues.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, environment, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.