In recent decades, the global economic landscape has undergone significant transformations, leading to geopolitical fragmentation. Emerging economies, including Pakistan, have faced formidable challenges such as the economic repercussions of the Covid-19 pandemic, surging food and energy prices due to the conflict in Ukraine, and elevated interest rates. These difficulties have resulted in high levels of debt and sluggish economic growth for these nations. Despite these issues, funding from international institutions like the International Monetary Fund (IMF) and World Bank has not kept pace with the expanding global economy.
The World Bank recognizes that debt has become a substantial burden for the poorest countries, hindering their ability to invest in crucial sectors like public health, education, and the environment. Consequently, these nations are forced to allocate a significant portion of their budgets to debt servicing rather than addressing urgent developmental needs. Pakistan mirrors this scenario, as its economy has been profoundly impacted by successive exogenous shocks over the past two years, prompting administrations to focus primarily on keeping the country afloat.
The challenge of restructuring commercial debt, constituting a smaller portion of external debt, is compounded by the involvement of multiple stakeholders and a cumbersome process. Bilateral debt, comprising almost one-third of the external debt, has led the government to avail itself of the payment moratorium under the G-20 debt relief initiative following the Covid-19 pandemic, according to the Finance Minister.
To address these issues and reduce reliance on external borrowing in the long run, Pakistan must explore avenues such as encouraging domestic savings, attracting foreign direct investment, and fostering public-private partnerships. These measures can contribute to the country’s economic resilience, allowing it to navigate the current challenges and prioritize sustainable development over the burden of external debt servicing. In doing so, Pakistan can strive towards a more robust and self-sufficient economic future.
