Copyright brecorder
EDITORIAL: Pakistan’s economic model is being eaten from within. Public debt has crossed 70.2 percent of GDP — far above the 60 percent legal ceiling — and now stands at roughly Rs80.5 trillion. Interest payments alone consume nearly 89 percent of federal net revenues. That leaves little for health, education or infrastructure. When almost every rupee earned by the state goes back to its lenders, growth cannot take root. The problem is no longer cyclical; it is structural. The economy has slipped into a self-reinforcing loop in which the government borrows to pay for its past borrowing, and the banking sector profits by keeping it that way. According to State Bank of Pakistan data, scheduled banks invested an additional Rs5.8 trillion in the government securities in the first nine months of 2025. Their total holdings have risen to Rs35.85 trillion, about half of all banking assets. At the same time, advances to the private sector fell by Rs1.27 trillion. This pattern exposes the heart of Pakistan’s growth crisis. When banks find it easier and safer to lend to the government than to businesses, private investment collapses. When the government absorbs all available liquidity, it crowds out productive credit. Industry stops expanding, exports stagnate, and job creation dries up. The same debt that was meant to sustain the economy begins to strangle it. Experts briefing the National Assembly’s finance committee last week described the situation as a “vicious cycle of fiscal dominance”. The government borrows heavily from banks to plug budget deficits; banks, in turn, use that guaranteed demand to earn risk-free profits through arbitrage between low-cost central-bank funding and high-yield government papers. This arrangement rewards passivity. The state gets short-term financing without reform, and banks get profits without risk. The losers are the taxpayers and the productive economy. The debt spiral also erodes monetary policy. When banks are over-exposed to government securities, any attempt by the State Bank to tighten or ease credit transmission becomes ineffective. Inflationary pressures persist, while high interest rates further discourage private borrowing. The outcome is visible: slow growth, expensive credit, and deepening fiscal stress. There are no shortcuts out of this trap. The finance ministry’s own data shows that unless GDP expands at about 5 percent annually, borrowing costs fall, and the primary fiscal balance turns positive, the debt-to-GDP ratio will keep rising through the next decade. A coordinated reform effort is essential — integrating fiscal forecasting with monetary policy, lengthening debt maturities, broadening non-bank financing, and steering external borrowing toward concessional, long-term instruments. Equally important is restoring credit to the private sector. No sustainable recovery is possible without productive lending. The State Bank must revisit its incentives and push banks to increase exposure to small and medium enterprises, exporters and industrial expansion. Cheap risk-free returns from government paper have made the system lazy. Banking stability means little if it rests on an economy that does not grow. The government, for its part, must impose genuine fiscal discipline. Development spending cannot be an afterthought, and subsidies or bailouts that widen the deficit must end. Transparency in debt management is now a matter of national survival. Each rupee borrowed at home or abroad should be justified against measurable returns. Pakistan’s debt challenge is not merely a matter of numbers; it is institutional. Without reform, the country will continue to live on borrowed money and borrowed time. The warning signs are clear enough. Debt is high, growth is low, and private credit is vanishing. Unless policy corrects the imbalance between state borrowing and private enterprise, the cycle will repeat — at a higher cost each time. Copyright Business Recorder, 2025
