Urgent reforms needed to end Pakistan’s external debt woes

Pakistan has been struggling with its external debt situation for years, and urgently needs comprehensive reforms to reduce its reliance on external loans, according to WealthPK.
By the end of the FY22-23 on June 30, the central bank's overall debt and liabilities had increased by 29 percent to Rs56.21 trillion. This increase in debt is a result of the government's heavy reliance on borrowing to meet its spending obligations.

The SBP reported that as a percentage of GDP, total debt and liabilities reached 91.1 percent in the Fiscal Year 2022-2023, from 89.7 percent in the previous fiscal year.

Talking to WealthPK, Azfar Ahsan, former minister of state and chairman Board of Investment (BOI), said, “One of the primary reasons for Pakistan's external borrowing has been the necessity to bridge the trade deficit, import essential goods, and fund significant infrastructure projects. While external borrowing can provide a short-term solution for immediate economic challenges, it also comes with considerable risks, such as higher interest payments, exchange rate fluctuations, and a growing debt burden.”

He underscored the need for urgent comprehensive economic and financial reforms aimed at bolstering domestic revenue generation, reducing corruption, and enhancing governance to break free from this vicious cycle.

“Pakistan's tax-to-GDP ratio is among the world's lowest. To boost domestic revenue and reduce the need for external borrowing, Pakistan needs effective tax reforms that can widen the tax base, curb tax-evasion, and improve tax collection,” Azfar added.

Nadeem ul Huq, Vice Chancellor Pakistan Institute of Development Economics (PIDE), told WealthPK that Pakistan's external debt challenge is a pressing issue that needs immediate attention and comprehensive reform efforts.

“Rationalizing government spending is essential to trim fiscal deficits. Streamlining public sector expenditures and eliminating wasteful subsidies can free up resources for development projects and debt servicing. Attracting foreign direct investment (FDI) is another way to reduce external borrowing. Pakistan needs to create an attractive investment climate by simplifying regulations, protecting property rights, and offering incentives to foreign investors,” he said.

“Maintaining fiscal discipline is crucial to preventing excessive borrowing. This involves implementing laws and policies that limit debt accumulation and ensure transparent and accountable management of public finances,” he added.
Simultaneously, the government must invest in human capital and domestic industries to promote self-reliance and export-led growth. By focusing on sectors with a comparative advantage, such as agriculture, textiles, and technology, Pakistan can strengthen its economic resilience and diminish the need for external financial aid.

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