Govt is no longer borrowing to fund infrastructure or improve human capital; it is borrowing to service interest on pr
KARACHI:
The prevailing narrative suggesting that Pakistan has achieved macroeconomic stability through the current International Monetary Fund (IMF) programme is a dangerous oversimplification. Such a perspective conveniently ignores the systemic erosion of the national industrial base under the crushing weight of an unsustainable debt-to-GDP ratio.
Government officials frequently cite a primary surplus of 2% as a grand triumph of fiscal discipline and prudent management. Yet they fail to acknowledge that such an accounting balance is achieved only by cannibalising the developmental budget and imposing a tax regime that stifles the very corporate growth required to service future obligations. The celebration of such metrics masks a deeper rot within the economic framework where short-term solvency is being prioritised over long-term viability. The scale of the crisis is evident in the violation of statutory financial limits. By allowing the total public debt to balloon to over Rs80 trillion, the state has effectively bypassed the legal boundaries set by the Fiscal Responsibility and Debt Limitation Act. This negligence has transformed the national economy into a massive machine designed solely for interest payments. The government is no longer borrowing to fund infrastructure or to improve human capital. It is borrowing simply to service the interest on previous loans.
Such a structural deformity is further exacerbated by a monetary policy that maintains aggressive double-digit interest rates. While ostensibly designed to curb inflation, these rates serve a dual and more insidious purpose. They enrich the commercial banking sector while decimating private industry. Commercial banks have ceased to act as intermediaries for business growth and instead prefer the risk-free and high-yield returns of government paper. The resulting crowding-out effect prevents the private-sector investment necessary to create the 30 million jobs the World Bank deems essential for social survival.
Opponents of this view argue that the current path of extreme austerity and high taxation is the only viable method to prevent a catastrophic sovereign default. Their logic is rooted in the fear that a default would isolate Pakistan from the global financial system and trigger hyperinflation similar to the economic collapses seen in other developing nations. They contend that the removal of energy subsidies and the aggressive expansion of the tax net are necessary painful steps intended to correct decades of fiscal profligacy and signal to international creditors that the country is finally serious about structural reform.
From such a perspective, the current economic contraction is merely a temporary stabilisation phase that will eventually lead to sustainable growth once the fiscal deficit is brought under control. Proponents believe the country will then achieve the credibility to attract high-value foreign direct investment in the energy and technology sectors. Such arguments suggest that the immediate social costs of unemployment and poverty are secondary concerns when compared to the existential threat of a total collapse of the national currency.
However, the defence of austerity fails to account for a fundamental economic reality. A state cannot tax its way into prosperity when the underlying productive capacity is being dismantled by prohibitive input costs and a lack of access to affordable credit. By driving energy tariffs and borrowing costs to prohibitive levels, the state has rendered its own export industries uncompetitive globally.
The result is a hollowing out of the economy where large-scale manufacturing is contracting and the small and medium enterprise sector is moving into the informal economy to escape the tax net. Such migration shrinks the formal fiscal base even further and places an even heavier burden on the few remaining compliant taxpayers.
Furthermore, the human cost is translating into a permanent economic casualty known as the brain drain. The most talented segments of the labour force are fleeing the country, taking their capital and skills with them. They leave behind a demographic bulge that lacks the skills or opportunities to contribute to the national exchequer. The result is a dependency ratio that the state cannot sustain. If the state continues to prioritise the demands of external creditors over the urgent need for domestic industrialisation, it risks a total rupture of the social contract. An outcome of this nature will render any technical fiscal recovery irrelevant in the face of widespread civil unrest. True stability can only be found in a radical restructuring of the domestic debt profile alongside transition to a growth-oriented model that utilises legislative mandates to protect the industrial sector from predatory taxation.
The solution to this systemic crisis lies in the immediate implementation of a comprehensive debt re-profiling strategy. Such a strategy must compel domestic lenders to accept a reduction in interest margins or a maturity extension on government securities. Simultaneously, the legislature must mandate a massive shift in expenditure from non-productive administrative costs to a national industrial stimulus fund. By replacing the current punitive tax architecture with a system of productivity-linked incentives, the government can encourage the private sector to reinvest its capital into manufacturing and exports rather than seeking refuge in the speculative real estate market or the shadow economy.
This approach must be coupled with a strategic legal framework that ensures transparency in the utilisation of foreign loans and establishes a sovereign wealth fund to manage the dividends from the upcoming Central Asian transit projects. These funds must be legally ring fenced for the sole purpose of long-term debt retirement and youth skill acquisition. Only through such decisive and structural intervention can the nation hope to escape the debt trap and achieve genuine economic independence.
The writer studied law at the University of Cambridge and trained as an economist at the University of Manchester
