PAKISTAN’S ECONOMY MAY LED TO ITS DISINTEGRATION
SARASIJ MAJUMDER
Pakistan’s nominal GDP in 2025 was approximately $407 billion to $410 billion, according to data from the International Monetary Fund (IMF) and Trading Economics.
GDP Growth Rate: ~2.7% to 3.2%. GDP per Capita: ~$1,696 – $1,707. PPP (Purchasing Power Parity) GDP: Estimated near $2.09 trillion.
ALL REFERENCE: WORLD ECONOMICS.
In late 2021, Pakistan entered a severe economic crisis as inflation surged, the Pakistani Rupee plunged in value, fuel supplies dried up, food was scarce.
Pakistan’s Expenditure in 2025: Pakistan’s total federal expenditure for the fiscal year 2025–26 was set at PKR 17.573 trillion (approximately $62 billion), according to data from Reuters and the National Assembly of Pakistan. This represented a 7% decrease in overall spending compared to the previous fiscal year (FY 2024–25), which had an outlay of PKR 18.877 trillion. Actually, both the year it exceeded.
Major Expenditure Breakdown:
The spending allocation follows a tightly constrained layout driven by debt burdens and structural costs:
Debt Servicing: (Interest Payments) PKR 8.21 trillion/$29 billion (~47%)
Defense Affairs & Services: PKR 2.55 trillion/$9.04 billion (~14.5%)
Others (Development, Subsidies, Civil Gov, etc.):
PKR 6.81 trillion/$23.96 billion (~38.5%)
WHAT EMERGE:
Key Allocation Insights: Debt Dominance: Nearly half of Pakistan’s total federal budget goes toward servicing its domestic and foreign debt obligations.
Defense Increase: The defense allocation of PKR 2.55 trillion represents an approximate 20% increase over the initial defense budget of the previous year.
IMF Constraints: The expenditure caps and fiscal restructuring targets were implemented to meet a reduction goal for the national fiscal deficit, aligning with the rules of Pakistan’s $7 billion IMF loan program.
Pakistan’s current economic model is structurally unsustainable without continuous external bailouts, heavy debt restructuring, and severe domestic austerity.
The baseline numbers show a deeply vulnerable fiscal state: when a country spends ~47% of its entire budget just paying the interest on its past debt, it leaves virtually zero room to invest in infrastructure, education, or healthcare to grow the actual economy. With Population increase—it is not sustainable.
The Core Drivers of Unsustainability: The Debt Trap Mechanic: The government borrows new money just to pay off the interest on old money. Domestic interest rates remain high to curb inflation, which simultaneously balloons the cost of internal borrowing. External debt obligations require continuous inflows of foreign currency (USD) that the country does not organically generate.
The Structural Twin Deficits- Fiscal Deficit: The state consistently spends significantly more than it collects in tax revenues.
Current Account Deficit: Pakistan imports far more goods (especially energy and fuel) than it exports.
The Result: The country suffers from a perpetual shortage of foreign exchange reserves, leaving it vulnerable to constant default risks.
Tax Base Failure: The tax-to-GDP ratio is exceptionally low, historically hovering between 9% and 10%. Large sectors of the economy—such as wealthy agricultural landowners, real estate wholesalers, and retail syndicates—are heavily undertaxed or completely subsidized. The tax burden falls disproportionately on a small pool of salaried individuals and formal corporate sectors.
The IMF Lifeline: What is keeping it afloat? Pakistan is currently bound to a $7 billion Extended Fund Facility (EFF) with the International Monetary Fund (IMF). This program acts as a financial bridge, but it comes with strict, painful operational rules.
Economists define a “debt trap” as a financial state where a nation must borrow new money simply to pay off the interest on its existing loans, without actually reducing the original principal amount. Pakistan has been operating in this cycle for years, and the problem has grown increasingly acute.
The Evidence of the Trap: The baseline numbers for the 2025–2026 fiscal cycle clearly illustrates this TRAP is cyclically dynamic.
The Consumption Rate: Pakistan’s total federal budget outlay was set at PKR 17.57 trillion (~$62 billion). Out of this, PKR 8.2 trillion (~47%) was swallowed entirely by debt servicing (interest payments). Essentially, almost 50 paise of every rupee the government spends goes straight to creditors before a single dollar is spent on the public.
Borrowing to Repay: Because domestic tax revenue cannot cover both running the government (military, civil administration, subsidies) and paying that 47% interest cost, Pakistan has to borrow more. In mid-2025, for example, Pakistan had to secure a $3.4 billion rollover from China just to prevent its foreign exchange reserves from collapsing below IMF-mandated thresholds.
Debt-to-GDP Ratio: The government’s debt sits between 68% and 73% of its nominal GDP. While some countries have higher ratios, Pakistan lacks the export volume and tax revenues to support this scale to leverage.
Why Can’t Pakistan Just “Escape” It? The trap is reinforced by internal structural issues: The Energy “Circular Debt” Crisis: Pakistan’s power sector is severely inefficient. The government owes vast sums to power producers (including PKR 423 billion owed to CPEC-linked Chinese plants alone). Because the state cannot collect enough cash from consumers due to line losses and electricity theft, this “circular debt” continues to compound, requiring multi-trillion-rupee government bailouts financed by more borrowing.
The Missing Export Engine: A healthy economy pays off foreign debt by exporting goods and earning foreign currency (USD). Pakistan’s imports historically far exceed its exports. This leaves the country reliant on overseas worker remittances or international rescue packages just to keep its foreign currency reserves manageable.
Predatory Domestic Crowding-Out: Because international credit agencies view Pakistan as high-risk, the government relies heavily on commercial banks inside the country for loans. By offering high interest rates to the state, the government “crowds out” the private sector—local banks prefer lending to the government rather than giving loans to businesses, which halts industrial growth.
What Emerge: Pakistan avoids a formal sovereign default only because external partners—mainly the IMF & World Bank, (USA controlled), ADB, China, Saudi Arabia, and the UAE—continually rollover old debts, and/or inject fresh cash to protect their geopolitical interests.
Pakistan remains firmly locked in a cycle of borrowing to repay past loans.
THIS IS DEBT TRAP. AND SOMEDAY THIS MAY LEAD TO DISINTEGRATION OF PAKISTAN.
HOW??—I WILL COVER IN NEXT BLOG.
REFERENCES: I furnish main three. Other information is from Public Domains.
- https://tradingeconomics.com/pakistan/gdp.
- https://sdpi.org/10742/blogs detail.
- https://www.worldeconomics.com/GrossDomesticProduct/Current-GDP/Pakistan.aspx.
- Others are referred in the ‘TEXT’.
