Introduction
Pakistan’s recurring economic crises are often explained to
the public in technical terms like exchange rate pressures, fiscal deficits or
“external shocks.” More recently, rising fuel prices and heavy taxation have
been justified as unavoidable consequences of IMF programs and international
oil prices, with politicians quick to shift blame onto their predecessors. But
when you look closely at the historical data, a more troubling reality emerges;
the problem isn’t just debt itself, it’s how that debt is created, used and
politically managed.
Since the mid‑1980s, Pakistan’s relationship with the IMF
has followed a predictable cycle. Governments borrow heavily to plug short‑term
gaps, stabilize reserves for a while and then repay or restructure just before
elections. This creates the illusion of fiscal discipline, but it masks deeper
structural weaknesses. Meanwhile, both external and domestic debt keep rising
in parallel, showing that borrowing has not contributed to sustainable capacity
development or self‑reliance.
The real question isn’t who borrowed, but why borrowing
never delivers real development. When debt accumulation is compared with
development spending, the picture is consistent, misgovernance, weak
accountability and widespread misappropriation. Instead of fueling growth,
borrowed money has often been absorbed into inefficient projects, politically
motivated schemes and patronage networks.
Chart 1(Closing Balances of IMF) illustrates this cycle
clearly. From 1984 until PPP took power in 1989, IMF exposure stayed below 400
million SDR, relatively contained. PPP’s first tenure raised borrowing to 467
million SDR but reduced it again before leaving office. PML‑N and PPP
governments that followed kept IMF balances low, with Pakistan owing just 132
million SDR by the late 1990s.
Under Musharraf, IMF debt briefly spiked but was fully
cleared by 2005, leaving Pakistan IMF‑free for several years. Then came the
Zardari era, when Pakistan borrowed record amounts of over 2 billion SDR between
2008–2010. Though repaid by 2011, the question remains: what structural
improvements justified such massive borrowing and where did the money go? Retiring
of this debt was just recycling it for elections.
The cycle repeated under PML‑N (2013–2018) and PTI (2018–2022).
Since 2022 present government borrowed billions and has retired debt as well
with current IMF debt standing at just 124.9 million SDR, a small figure. This
is again an illusion.
The pattern is unmistakable: IMF loans are being used as short‑term
political tools, not long‑term reform strategies. They grab headlines because
they come with strict conditions like higher taxes, subsidy cuts, interest
rates and inflation that ordinary citizens feel immediately. But IMF debt is
only the surface. The deeper problem lies in the external debt that keeps
growing quietly in the background, largely hidden from public debate.
The Real Danger
The real danger in Pakistan’s debt story isn’t the IMF —
it’s the external debt that has quietly ballooned over decades, often hidden
from public debate. IMF loans are visible, discussed and sometimes even retired
before elections. External borrowing, on the other hand, has grown relentlessly
under every regime, no matter who was in power.
Chart 2( External Debt Vs IMF and External Injection) shows
how modest things once were. Until 1988, external debt hovered around just $1
billion, nothing to be proud of. But in 1989, when PPP took charge, the
floodgates opened: borrowing jumped 20% in the first year and 25% the next,
adding $4.3 billion. PML‑N followed with more increases, piling on another $3.8
billion. PPP’s second tenure kept the momentum, adding $4.7 billion, while PML‑N
accelerated further with $9.2 billion in just two years.
Musharraf in his 11 years of tenure, added a staggering $60
billion. But the sharpest surge was during PPP’s post‑2008 government, often
called a “recovery phase”. In reality it
was debt trap, external debt exploded by over 36%, adding $61 billion in one
go. PML‑N then added $51 billion, PTI $37 billion, and the current regime has
broken all records with $74 billion, the highest increase ever in a single
tenure.
Cumulatively, PPP accounts for about $70 billion, PML‑N for
$134 billion, Musharraf for $60 billion and PTI for $37 billion. The pattern is
unmistakable: every government has leaned heavily on external borrowing as a
quick fix.
But here’s the troubling part. Between 1984 and 2026,
Pakistan’s trade deficit totals around $230 billion. External borrowing,
however, has reached $303 billion, with another $138 billion still outstanding.
That leaves a gap of roughly $211 billion that cannot be explained by trade
needs or visible development.
This isn’t just a minor accounting error. It points to systemic
opacity and misappropriation. Borrowed money hasn’t translated into stronger
exports, better infrastructure or sustainable growth. Instead, it has
disappeared into inefficiencies, leakages and corruption. The economy is left
carrying the debt, while citizens don’t see improvement in their daily lives.
Domestic Debt: The Silent Burden
Pakistan’s debt story isn’t just about what we owe abroad.
To truly understand the crisis, we need to look at external debt alongside
domestic debt. In theory, foreign loans should ease pressure on local
borrowing. But Chart 3 (Year on Year Internal & External Debt Increas)
shows the opposite: instead of reducing reliance on domestic debt, it has coincided
with external inflows and its rapid expansion.
The data from SBP reports, IMF consultations and World
Bank/ADB tables paints a troubling picture. By 2026, Pakistan’s fiscal deficit
is projected at nearly PKR 7 trillion; almost 90% of that gap will be financed
through borrowing at home.
This combined view highlights a structural imbalance.
External debt has piled up, but it hasn’t lightened the domestic load. Instead,
both have grown side by side. The result is a vicious cycle of more borrowing,
bigger deficits and more pressure on ordinary citizens through taxes and
inflation.
How Domestic Debt Grew
For two decades, things looked relatively stable. From
General Zia through Musharraf, domestic debt grew at about 10% a year. It was
manageable and external inflows occasionally gave breathing space, though
nothing to be proud of. But after 2008, the pattern changed dramatically.
- PPP
(2008–2013): Domestic debt shot up, averaging 21% growth per year,
with spikes as high as 26%.
- PML‑N
(2013–2018): Sustained borrowing at around 20% growth.
- PTI
(2018–2022): Continued at roughly 21%.
- PML‑N
(2022–2025): Pushed it even higher, averaging 25% annually.
- 2026
projection: Already up 11.5% in the first quarter, suggesting full‑year
growth could spiral to 35–45%.
What’s striking is that no government has slowed this pace.
Each has added to the burden, regardless of political affiliation.
Where the Money Goes
And here’s the most troubling part that the borrowed money
has rarely gone into productive investments or industries that generate
returns. Instead, it has been absorbed by recurring expenses like government
salaries, pensions, subsidies, parliamentary perks and social programs like
BISP. Some of these may be necessary, but the lack of financial discipline is
glaring.
Successive governments blame their predecessors for rising
debt, yet none have shown the courage to cut administrative excesses or elite
privileges. The public sees deterioration in services and infrastructure.
The Deeper Truth
The key takeaway is clear: external borrowing has not eased
domestic pressure. Instead of replacing internal financing, it has piled on top
of it. Pakistan has become structurally dependent on borrowing from both sides that
is external and domestic; worst part is without any serious attempt to mitigate
these risks.
This reveals a deeper truth, Pakistan’s debt problem isn’t
just about economics, it’s about behavior. It’s about entrenched fiscal habits of
weak fiscal discipline, limited accountability and politically driven spending
priorities. Domestic debt has become the silent engine of Pakistan’s fiscal
crisis, growing relentlessly while citizens shoulder the burden through
inflation, taxation and declining public services.
Allocations Without Accountability: Pakistan’s
Development Trap
It’s often said that Pakistan’s budget
deficit is driven by development spending. But the real issue isn’t just how
much money is allocated but how that money is used. Chart 4(Development
Expense Federal and Provincial) makes this painfully clear that the problem
lies in weak governance, poor accountability and outright corruption.
In theory, development funds should
build roads, improve infrastructure and create long‑term growth. In practice,
they’ve too often become a drain on the economy. Big projects like motorways
and Bus Rapid Transit systems have been plagued by cost overruns, delays and
corruption scandals. Energy contracts with Independent Power Producers (IPPs)
locked Pakistan into unfair deals, where investors put in rupees but get paid
in dollars and “capacity charges” even when plants sit idle. Instead of
strengthening the economy, these projects have created long‑term liabilities, which
is now being shouldered by common man in shape of high energy cost.
Looking at the numbers, every regime
has poured more money into development:
- Zia kept growth modest at 8–10% per year.
- PPP under Benazir raised it to 12–14%.
- Nawaz Sharif’s PML‑N pushed it to 14–16%.
- Musharraf kept it contained at 10–12%.
- Zardari’s PPP exploded spending to 18–22%, with peaks above 25%.
- PML‑N (2013–2018) sustained 20%, driven by motorways and CPEC energy
projects.
- PTI (2018–2022) kept 20–21%, adding BRTs, health and COVID response.
- PML‑N (2022–2025) raised it further to 25%, the highest sustained
pace.
- Early 2026 already shows an 11.5% jump, with full‑year growth
projected at 35–45% — a dangerous escalation.
When we talk about provincial
development spending, it’s not just about the billions allocated on paper; it’s
about what people see in their cities every day. Roads, sanitation, public
transport and urban planning are where development funds either prove their
worth or expose mismanagement.
Development Spending:
Allocations vs Outcomes
Looking back, until 1986 the story was simple, every
provincial capital received around PKR 1 billion, except Quetta, which was
given half that amount. The first real shift came in 1987, when Karachi’s
allocation doubled, setting the stage for decades of uneven growth.
For years, allocations across 3 major cities remained
stable, while Quetta crept upward slowly but steadily, averaging about 12%
growth annually to reach PKR 50 billion by 2026. Peshawar followed a similar
path, growing at 11% per year to stand at PKR 55 billion.
Karachi and Lahore, however, tell a very different story.
Their allocations exploded after the 18th Constitutional Amendment, which
devolved fiscal authority to provinces and “Ajab corruption ki gajab kahani starts”.
Karachi’s budget grew at an average of 15% per year, reaching PKR 400 billion
by 2026. Lahore’s grew by 14% annually, reaching PKR 120 billion. The financial
data directly challenges the PPP government’s claim of having fewer resources
compared to Punjab.
But here’s the reality, despite Karachi receiving three
times more than Lahore, the city is collapsing under the weight of
mismanagement. Roads are broken, garbage dumps line the streets and
encroachments choke public spaces. Except for Shahrah‑e‑Faisal, almost every
road in Karachi is scarred with ditches every few hundred meters. Lahore, on
the other hand, has cleaner streets, better road networks, improved aesthetics
and far less encroachment. With only a fraction of Karachi’s funds, Lahore
continues to improve day in and day out, while Karachi deteriorates at twice
the speed.
This contrast is not about money; it’s about governance.
Development allocations, no matter how large, achieve little when corruption
and mismanagement dominate the system. Karachi’s billions have been squandered,
while Lahore’s comparatively smaller budgets have been translated into visible
improvements, despite their portion of corruption. The difference lies in
execution: Lahore’s development has been driven by local stakeholders with a
vested interest in the city’s progress, whereas Karachi’s projects remain under
the influence of non‑locals, detached from the realities on the ground.
The same pattern emerges when comparing KP and Balochistan.
Both provinces receive similar allocations, yet KP has managed to deliver
better infrastructure, while Balochistan remains in shambles. This undermines
the narrative that Balochistan is simply deprived of its rights; the real issue
lies in weak governance, poor project execution, Balochistan’s political
leadership and lack of accountability.
The lesson is simple: Pakistan’s
problem isn’t the size of development budgets; it’s the failure of governance.
Without accountability, transparency and performance‑based spending,
development funds become a pipeline for inefficiency, political gratification
and corruption
The conclusion is unavoidable; Pakistan’s development
spending has become a mirror reflecting the corruption and inefficiency of its
political elites
Conclusion
Pakistan’s recurring economic crises are not simply the
result of IMF programs or large development budgets. The deeper problem lies in
decades of misgovernance, weak financial discipline and entrenched corruption
across every regime, the only difference was in scale.
Governments have repeatedly borrowed to plug short‑term
gaps, repaid or restructured just before elections and claimed success; whereby
creating an illusion of fiscal discipline while leaving structural weaknesses
untouched. External debt has ballooned far beyond the country’s trade deficit,
with billions unaccounted for, raising serious concerns about misuse and
misappropriation. Domestic debt has grown in parallel to finance salaries,
pensions, subsidies and political perks rather than productive investments.
Development spending tells the same story. Allocations have
risen sharply, yet outcomes remain zero.
Over the decades, governments have played the same game of
borrowing heavily, spending inefficiently, blaming predecessors and leaving
ordinary citizens to bear the burden through inflation, taxation and collapsing
public services.
The evidence is clear; Pakistan’s debt crisis is not about a
lack of resources. It is about failure of governance. Unless corruption is
confronted, accountability enforced and spending tied to real outcomes, the
cycle of borrowing and decline will continue and the people will continue to pay
for the sins of their rulers.
