The objective of incurring sovereign debt is to extricate a nation from existing crises and fund investments for growth and development. However, reliance on debt should be prudent and not excessive. When a nation fails to manage its debts effectively, it can enter a state of debt distress — a challenging and painful process.

In such cases, the debt itself becomes a crisis, often exacerbating the initial problems that prompted the borrowing. As of 2023, the total debt and liabilities-to-GDP ratio stood at 89.9 per cent, accompanied by an annual deficit exceeding 6.9pc of GDP. Should this trend persist, what fiscal challenges will Pakistan face in the short and long term, and how might these be overcome?

Similarly, Pakistan is facing dual debt challenges: First, it borrows heavily from international financial institutions — total external debt and liabilities are 42.1pc. This necessitates significant dollar expenditures to repay these debts, putting pressure on the country’s fiscal outlook and compelling further borrowing from international financial institutions.

Simultaneously, the country owes substantial amounts to its own financial institutions, about 47pc of its GDP. Most of this debt comes from local banks, constituting more than 87pc of the money these banks lend to the government.

Consequently, a significant portion of the budget — specifically, debt servicing payments amounting to Rs9.8 trillion, up from Rs7.3tr the previous year, nearly equal to government revenues — is allocated to this end in fiscal year 2024-25.

Failure to address fiscal risks has aggravated poverty........

© Dawn Business