Pakistan urged to lead push for global debt reforms

Pakistan urged to lead push for global debt reforms

The global financial system is facing growing pressure as mounting debt burdens threaten economic stability and limit developing countries’ ability to invest in essential development projects. The issue took centre stage at the IMF and World Bank annual meetings in Bangkok last month, following renewed calls for major reforms to the international financial architecture.

The Fourth Financing for Development (FfD4) Conference, held in Seville in July 2025, had already highlighted the growing risks posed by global debt distress. Planning Minister Ahsan Iqbal reiterated the need for fundamental changes at the Sustainable Development Policy Institute’s (SDPI) 29th Sustainable Development Conference, arguing that minor adjustments would not address the scale of the problem.

Global debt continues to grow faster than many countries’ ability to manage it, leaving governments with fewer resources for public services and development. According to the Institute of International Finance (IIF), worldwide debt reached a record $348 trillion by the end of 2025. Meanwhile, average global debt per person exceeded $42,000, almost three times the average annual income per capita of approximately $14,400, according to World Bank figures.

Developing economies face an even greater challenge because rising international interest rates and the strength of the US dollar increase their borrowing and repayment costs. World Bank data shows that low-income countries collect government revenue equivalent to just 12 per cent of GDP, compared with 26 per cent in high-income economies. This significant gap leaves poorer nations with limited capacity to meet debt obligations while funding essential services.

External shocks further complicate the situation. Rising oil prices amid tensions in the Middle East, for instance, place additional pressure on low-income oil-importing countries, many of which already struggle with heavy debt repayments.

The IMF’s debt sustainability assessments, updated in September 2025, indicate that nearly half of low-income countries face debt distress or a high risk of falling into it. Since 2020, countries including Zambia, Ghana, Sri Lanka and Ethiopia have defaulted on their debt obligations.

The human cost of the crisis remains significant. The World Bank estimates that more than 837 million people continue to live in extreme poverty, many of them in countries struggling with severe fiscal constraints.

Against this backdrop, Pakistan has an opportunity to push for meaningful international reforms as it prepares to chair the IMF-World Bank Boards of Governors in 2027. Its own experience offers an important perspective. In 2023, Pakistan came close to default as foreign exchange reserves held by the State Bank of Pakistan fell to around $3 billion, covering less than three weeks of imports.

International efforts to address sovereign debt problems have so far produced limited results. The G20’s Common Framework, designed to facilitate debt restructuring, has faced lengthy negotiations, slow implementation and modest progress.

The changing composition of international creditors has also made debt negotiations more complicated. Alongside traditional Paris Club lenders, countries now borrow from private bondholders, emerging bilateral creditors and lenders offering loans against collateral. Coordinating these different interests often delays restructuring and makes timely agreements difficult.

Several reforms could help address these weaknesses. The first priority is to establish a predictable, transparent and rules-based mechanism for restructuring sovereign debt. Legislative changes in major financial centres such as New York and London, whose legal systems govern most international sovereign bonds, could provide stronger legal foundations for an effective restructuring framework.

Pakistan should use its upcoming leadership role to build international support for a more transparent and equitable financial system that gives developing countries a fairer chance to overcome debt crises and pursue sustainable growth.