How the debt trap deepened
Pakistan’s debt crisis is no longer just an economic problem buried in government reports and IMF documents. It is now shaping nearly every major policy decision the state makes.
As of December 31, 2025, Pakistan’s total public debt, domestic and external combined, stood at PKR 81 trillion (USD 292 billion), equivalent to 70.7pc of GDP. Nearly 47pc of the federal budget for FY26 is expected to be consumed by debt servicing and interest payments alone (Finance Division, 2025). In practical terms, almost every second rupee collected by the government is being used to repay loans rather than fund health, education, energy, defense or development.
The pressure is becoming harder to contain. Pakistan recently entered its 25th IMF bailout programme worth USD 7 billion (IMF, 2024), a stark reminder of the country’s continuing dependence on external financing. Meanwhile, foreign exchange reserves remain at just around USD 17 billion (SBP, 2026), barely enough to cover three months of imports, while external financing needs are projected to reach nearly USD 100 billion by 2029 (The Strait Times, 2025).
The structure of the debt itself reveals deeper vulnerabilities. Domestic debt accounts for nearly PKR 55 trillion, around 68pc of total public debt, while external liabilities stand at PKR 23 trillion (SBP, 2026). Much of the domestic borrowing is tied up in long-term instruments such as Pakistan Investment Bonds and GOP Ijara Sukuk, alongside short-term Market Treasury Bills (SBP, 2026). But as repayment maturities approach, refinancing pressures are likely to intensify. At the same time, geopolitical tensions in the Middle East could fuel imported inflation and place further pressure on the exchange rate, increasing the cost of servicing external debt.
Pakistan’s external sector offers little breathing room. In FY25, imports of goods and services reached roughly USD 70 billion, compared to exports of only USD 41 billion (SBP, 2026). A record USD 38 billion in workers’ remittances temporarily helped stabilize the current account, but the broader structural imbalance remains unresolved. If geopolitical tensions in the Middle East persist, particularly if they lead to layoffs of Pakistani workers in the Gulf, Pakistan could face additional pressure on its foreign exchange inflows. The UAE alone accounted for nearly USD 8 billion in remittances last year, making any disruption economically significant.
Fiscal weakness has only deepened the crisis. Pakistan’s tax-to-GDP ratio stood at just 10.3pc in FY25 (Ministry of Finance, 2025), far below the Asia-Pacific average of 19.6pc (OECD, 2025). Meanwhile, heavy government borrowing from commercial banks, PKR 33.6 trillion against deposits of PKR 37.4 trillion (SBP, 2026), appears to hava crowded out private sector lending and weakened investment activity. The fallout is increasingly visible in the form of rising taxes, expensive electricity, shrinking social support, and growing outward migration (World Bank, 2025; Dawn, 2026; BEOE, 2026).
Pakistan’s debt crisis, therefore, is not simply about numbers on a balance sheet. It reflects a broader cycle of weak exports, narrow taxation, chronic borrowing and delayed reform. Breaking that cycle will require fiscal consolidation, structural reform and export-led growth, all while navigating the country’s deeply entrenched political economy constraints.
Who really pays taxes?
For decades, Pakistan’s fiscal system has relied on a narrow group of taxpayers while large segments of the economy continue operating outside the tax net. That imbalance now sits at the heart of the country’s debt crisis.
The IMF’s Extended Fund Facility approved in 2024 identifies fiscal consolidation as a key condition for stabilizing Pakistan’s public finances (IMF, 2025). Although the government has attempted to reduce expenditures, estimated at PKR 17.57 trillion in FY26 compared to PKR 18.9 trillion in FY25 (Reuters, 2025), long-term adjustment will require stronger revenue generation. In particular, the tax base must be broadened by targeting sectors that remain under-taxed relative to their economic size, especially retail, agriculture and real estate.
At present, the burden of taxation falls disproportionately on salaried individuals and formal manufacturers because they are easier for the Federal Board of Revenue to document and monitor. Reports suggest the salaried class pays nearly 38pc of its gross income in taxes, significantly higher than contributions from sectors such as retail and real estate (Tribune, 2026). Meanwhile, repeated attempts to tax traders and undocumented businesses have often been weakened by political pressure (Tribune, 2026).
Without widening the tax net, fiscal consolidation will remain incomplete. Stronger enforcement, combined with technology-driven reforms, may offer a way forward. Linking national identity numbers, business registrations, and tax records through digital track-and-trace systems could reduce undocumented cash transactions and improve compliance. Expanding financial inclusion, already estimated at around 67pc in 2025 (SBP, 2026), alongside greater use of digital payments, as pushed by SBP, may also help bring more economic activity into the formal sector.
Can Pakistan Ease its tax burden?
Fiscal reforms may be necessary, but they are unlikely to deliver immediate relief. Tax reforms, export growth, and structural adjustment take years to produce meaningful results. Pakistan, however, is dealing with a crisis that also demands short-term breathing space.
This is where debt restructuring enters the conversation. To reduce immediate servicing pressures, Pakistan may eventually need to renegotiate parts of its domestic and external debt obligations. High-interest debt instruments could potentially be restructured through extended maturities or lower interest payments, temporarily easing fiscal strain and allowing the government to redirect resources toward essential public spending and targeted support for vulnerable households.
But restructuring debt is never just a financial exercise. It is also a political and diplomatic negotiation. Creditors often demand tougher fiscal commitments and deeper structural reforms in return for concessions. Any sign of policy uncertainty can also weaken investor confidence and increase borrowing risks.
Successfully navigating such negotiations therefore requires more than technical expertise alone. It demands political credibility, institutional coordination and the ability of the state to convince both markets and international partners that reforms will actually be sustained.
Why exports matter more than bailouts
In the long run, Pakistan cannot borrow its way out of a debt crisis. Sustainable debt management ultimately depends on one thing: the country’s ability to generate foreign exchange through stronger exports.
Higher exports would not only reduce external imbalances but also strengthen foreign exchange reserves and improve Pakistan’s capacity to service external debt obligations. More importantly, export growth can stimulate domestic production, create employment, and support broader economic expansion.
But export growth does not happen automatically. It requires structural reforms that improve productivity and competitiveness across the economy. Measures such as lowering tariffs on intermediate inputs, simplifying export procedures and reducing regulatory bottlenecks can lower business costs and help Pakistani firms compete more effectively in global markets. At the same time, supporting small and medium-sized enterprises could diversify the export base and widen participation in international trade.
Investment in skills, technology, infrastructure and energy efficiency will also be essential to raising productivity and reducing production costs over time. Vietnam’s export-led growth model, particularly its integration into global value chains through trade in value added, offers an important example of how sustained reforms can significantly expand export earnings and strengthen long-term debt sustainability (Nguyen Viet Khoi & Chaudhary, 2018).
The politics of economic reforms
Economic reforms do not fail in Pakistan because policymakers lack ideas. More often, they fail because politics gets in the way.
In theory, measures such as tax reform, fiscal consolidation, and export-led growth appear straightforward on paper. In practice, however, they collide with powerful interest groups, weak institutions and widespread public distrust. Pakistan’s political economy has long allowed economically influential sectors, particularly agriculture, retail and real estate, to remain lightly taxed despite their large footprint within the economy. These groups maintain considerable influence within policymaking circles, making meaningful reform politically difficult.
The imbalance has created growing frustration among salaried and documented taxpayers, who continue to shoulder a disproportionate share of the tax burden. Yet attempts to widen the tax net have repeatedly triggered resistance from traders and business lobbies. Any serious reform effort will therefore require gradual implementation through a combination of incentives, negotiation and stronger enforcement mechanisms to avoid political backlash.
Public attitudes toward taxation present another challenge. In many business communities, taxes are viewed less as a civic responsibility and more as a penalty imposed by the state. Rebuilding trust will require greater transparency in public spending and clearer evidence that tax revenues are being used to improve essential services rather than sustain inefficiency and corruption. Addressing corruption itself remains critical. According to an IMF Governance and Corruption Diagnostic Assessment, reducing corruption could increase Pakistan’s GDP by 5-6.5pc over five years (Reuters, 2025).
Political instability further complicates the picture. In Pakistan’s 78-year history, no prime minister has completed a full constitutional term in office (Aljazeera, 2022). Frequent leadership changes have repeatedly disrupted policy continuity, making long-term economic planning difficult. Reforms such as expanding taxation, restructuring debt, or pursuing export-led growth require consistency that often extends beyond electoral cycles.
Without broader political consensus, even technically sound reforms risk becoming temporary measures rather than lasting solutions. Pakistan’s debt crisis, therefore, is not just an economic challenge, it is also a political one.
Breaking the cycle
Pakistan’s debt crisis is often discussed as a numbers problem – rising liabilities, shrinking reserves, widening deficits. But beneath the statistics lies a deeper structural reality. The crisis persists not simply because Pakistan borrows too much, but because the economy continues to generate too little revenue, too few exports and too little political consensus for reform.
Decades of persistent fiscal deficits, a narrow tax base, and repeated dependence on borrowing have trapped the country in recurring debt cycles. Breaking that pattern will require more than temporary IMF programmes or short-term stabilization measures. Structural reforms, particularly broader taxation, selective debt restructuring and a gradual shift toward export-led growth, remain essential for long-term sustainability.
Yet economics alone will not determine success. Political economy constraints continue to shape the limits of reform. Powerful interest groups, weak tax compliance, institutional fragility, and chronic political instability have repeatedly slowed or diluted policy implementation. In such an environment, even well-designed reforms can struggle to survive.
For that reason, economic reforms must also be politically manageable. Gradual implementation, stronger institutions, greater transparency and broader political consensus will be necessary to sustain difficult policy choices over time. Without addressing these underlying constraints, Pakistan risks remaining trapped in the same cycle of crisis, bailout and recovery that has defined much of its economic history despite its considerable economic potential and rich human capital.
Appendix
Table 1: Fiscal Deficit & Financing for FY2025-26
Source: Ministry of Finance, Government of Pakistan 2026
https://www.finance.gov.pk/budget/budget_2025_26/budget_in_brief_10062025.pdf
Figure 1: Tax-to-GDP ratio regional comparison in 2023 (OECD)
The author holds a Master’s in Public Policy (Economics and Development) from the Lee Kuan Yew School of Public Policy, National University of Singapore (NUS), where he studied as a fully funded scholarship recipient.
Disclaimer: The views expressed are my own and do not reflect those of any affiliated institution.