debtocracy 038 bankruptcy

Debtocracy & bankruptcy of ideas   

Pakistan’s debt problem has entered a new phase. The headline figure is alarming: total debt and liabilities reached Rs. 99.59 trillion by the end of fiscal year (FY) 2025-26. The deeper concern, however, lies in the composition of this debt, the burden of servicing it and the channels through which public borrowing now affects every productive sector of the economy.

According to the latest State Bank of Pakistan data, total debt stood at Rs. 97.88 trillion. Gross government domestic debt reached Rs. 59.44 trillion, while external debt amounted to Rs. 36.20 trillion. Central government debt increased by 7.39% over the preceding year to Rs. 83.64 trillion. External debt and liabilities stood at US$138.85 billion.

These numbers confirm the central argument developed in the a ten-part series published in these columns [‘Bankruptcy of ideas—X: Debt, Taxes & Democracy, Minute Mirror, June 21, 2026]. Pakistan has not merely borrowed against its future. It has increasingly borrowed to service earlier borrowing, while failing to create sufficient productive capacity from the accumulated debt.

 

‏The external debt-servicing profile for FY2026 makes this particularly clear. Pakistan serviced US$21.59 billion of external debt during the year. An extraordinary US$10.14 billion—nearly half of the annual amount—fell in the final quarter alone. Quarterly servicing was 2.63 times the amount paid in the preceding quarter, mainly because principal repayments jumped from US$2.70 billion in the third quarter to US$8.81 billion in the fourth.

This concentration of repayments is as important as the overall debt stock. A country may carry a large debt if its economy generates sufficient revenue, exports and foreign exchange to service it. Pakistan’s difficulty is that debt obligations have expanded much faster than the productive and export capacities needed to meet them.

The debt accumulated over decades cannot be attributed to one government or one fiscal year. Persistent fiscal deficits, a narrow and inequitable tax base, losses of state-owned enterprises, the energy-sector circular debt, excessive recurrent expenditure, exchange-rate depreciation and repeated balance-of-payments crises have all contributed to it. Borrowing became the preferred substitute for reform

Governments borrowed because they could not tax influential sectors, restructure loss-making enterprises, reduce wasteful expenditure or build a competitive export economy. External lenders financed temporary stability, while domestic banks financed the fiscal deficit. Each arrangement postponed difficult decisions without removing the causes of the crisis.

The Ministry of Finance reported public debt at 70.7% of GDP by June 2025. The ratio may improve when nominal GDP grows faster than debt, especially during periods of inflation, fiscal consolidation and lower interest rates. A declining debt-to-GDP ratio, however, does not necessarily mean that the debt burden has become harmless.

Pakistan’s debt stock is still increasing. What has improved is the immediate cost of servicing parts of it.

Total debt and liabilities servicing declined from Rs. 13.16 trillion in FY2025 to Rs. 11.97 trillion in FY2026. Interest payments on debt fell by more than 23%, from Rs. 9.47 trillion to Rs. 7.27 trillion, largely because lower policy rates reduced the cost of servicing domestic government debt. Interest payments on gross government domestic debt consequently fell from Rs. 8.08 trillion to Rs5.99 trillion. This is welcome relief. It should not be presented as the end of the debt crisis.

Lower interest rates reduce the flow cost of debt; they do not extinguish the stock. Principal repayments on external debt and liabilities increased from Rs. 3.47 trillion to Rs. 4.47 trillion during FY2026. Pakistan therefore obtained relief on domestic interest payments while facing a substantially heavier external repayment burden.

The distinction is between debt management and economic transformation. Pakistan may be moving from an acute debt-accumulation crisis towards a more manageable financing position. It has not escaped debtocracy—the system in which fiscal policy, taxation, banking, foreign relations and development priorities become subordinate to the requirements of borrowing and repayment.

Debtocracy does not remain confined to the accounts of the Ministry of Finance. It is transmitted throughout the economy. The first channel is the banking system. Government securities offer banks sovereign backing, liquidity and attractive risk-adjusted returns. Lending to the government is easier than evaluating businesses, financing innovation or supporting small and medium enterprises. A large domestic borrowing requirement therefore creates continuous competition for available liquidity.

The result is crowding out. The State obtains the funds it requires, banks earn relatively secure returns and the private sector bears the adjustment. Productive businesses face limited access to credit, higher risk premiums and shorter financing horizons. Smaller enterprises suffer the most because they cannot compete with the sovereign for bank liquidity.

This creates a financial system that can remain profitable while the productive economy remains weak. Deposits are mobilised from citizens and businesses, channelled into government securities, and then used substantially to meet recurrent expenditure and service earlier debt. Banking expands without an equivalent expansion in productive capacity.

The second channel operates through foreign exchange. External debt repayment creates demand for dollars. That demand places pressure on reserves and the current account. Any resulting exchange-rate depreciation increases the rupee value of external liabilities and raises the domestic price of imported fuel, machinery, raw materials and intermediate goods. 

The chain is direct: External repayment creates foreign-exchange demand; reserve pressure increases exchange-rate sensitivity; depreciation generates imported inflation; and inflation raises working-capital requirements and production costs.

Debt consequently becomes a corporate balance-sheet issue. An industrial enterprise may have no external loan, yet still bear the effects of sovereign external debt through a weaker rupee, costlier imports, higher energy prices and restricted access to domestic credit. Consumers ultimately pay through inflation, reduced employment and lower real incomes.

The third channel is fiscal. Every rupee allocated to debt servicing is a rupee unavailable for education, health, water, climate resilience and productive infrastructure—unless the State raises additional revenue or borrows again. Pakistan then enters a circular arrangement: borrowing creates servicing obligations, servicing compresses development expenditure, weak development limits growth and revenue, and insufficient revenue necessitates further borrowing.

This is why a primary surplus, though necessary, is not sufficient. It can stabilise debt dynamics, but it cannot by itself transform the economy. Stability becomes sustainable only when fiscal consolidation is accompanied by higher productivity, diversified exports, improved human capital and greater domestic revenue raised according to the ability-to-pay principle.

The relevant question is not whether Pakistan can continue borrowing. It probably can, provided external refinancing remains available, nominal GDP growth exceeds the effective cost of debt and the government maintains sufficient fiscal discipline.

The real question is what the borrowing finances. Debt used for efficient infrastructure, export capacity, energy security, technological development and human capital can enlarge the economy’s repayment capacity. Debt used to finance current consumption, untargeted privileges, inefficient enterprises and recurring fiscal gaps merely transfers the cost of present political choices to future taxpayers.

Pakistan therefore needs a binding distinction between productive and unproductive borrowing. Every major loan should identify the asset or capacity it will create, its expected economic return, its foreign-exchange implications and the source from which it will ultimately be repaid. Parliament and the public should be able to examine these claims before liabilities are contracted, not after the money has been spent.

Domestic borrowing must also be linked to financial-sector reform. Banks cannot remain primarily intermediaries between depositors and the government. Regulatory and fiscal incentives should encourage longer-term lending to agriculture, industry, technology, exports and small enterprises without compromising credit discipline.

External borrowing requires an even stricter test. Foreign-currency debt should preferably finance activities capable of earning or saving foreign exchange. Borrowing dollars to meet rupee-based recurrent expenditure is one of the surest ways of converting a fiscal weakness into a balance-of-payments crisis.

The decline in interest payments during FY2026 provides breathing space. It does not provide an escape. That space can either be used to restructure the economy or consumed until the next interest-rate, exchange-rate or refinancing shock arrives.

Pakistan will emerge from debtocracy only when borrowing ceases to substitute for taxation, governance and productive investment. The Rs.100 trillion headline is not merely a record of what Pakistan owes. It is a measure of opportunities already consumed and a warning about choices still to be made.

Debt becomes manageable when it creates the capacity to repay itself. Without that transformation, improved ratios and lower interest payments will amount to another interval of stabilisation—while the underlying bankruptcy of ideas continues.

___________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, environment, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. 

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The teachings of Data Ganj Bakhsh retain considerable relevance in the 21st century. In an era characterized by consumerism, occupational precarity, and digital hyper-connectivity, his advocacy of qana‘at and dhikr offers a corrective to stress, anxiety, and existential vacuity. His framework suggests that psychological equilibrium is derived less from material accumulation than from interior discipline and divine orientation.   Furthermore, his principle of social service addresses contemporary challenges of poverty, isolation, and inequality. The institutionalized langar at Data Darbar exemplifies this ethic and provides a model for civic engagement, volunteerism, and communal solidarity.   In the context of digital communication, his insistence on akhlaq assumes particular salience. His exhortations to truthfulness, humility, and restraint provide a normative basis for addressing online hostility, misinformation, and the erosion of civility. For students and professionals alike, his model affirms that technical competence must be accompanied by moral integrity.   Finally, his doctrine of equilibrium between spiritual and worldly responsibilities offers a viable paradigm for modern Muslim subjects. He did not advocate monasticism, but rather the integration of professional, academic, and technological life with enduring spiritual commitments. This synthesis enables individuals to pursue vocational excellence without compromising ethical values.   In conclusion, the legacy of Hazrat Ali Hajveri (R.A) transcends its historical milieu. Centered on love of Allah, service to humanity, and self-purification, his teachings provide a coherent response to contemporary social and psychological challenges. The adoption of these principles at the individual and communal level holds the potential to foster more just, compassionate, and purpose-driven societies.

  • After Makkah: towards an Islamic NATO—or a new r…

    “Nato is a giant military alliance where there are 32 countries. We have started here as three countries and we have to take very humble but concrete steps”—Makkah defence pact technically same as Nato’s Article 5: Turkish minister, The News, August 9, 2026 The above words of Turkish Foreign Minister Hakan Fidan deserve careful attention. Speaking after the Makkah Joint Defence Agreement between Türkiye, Pakistan and Saudi Arabia, he went considerably further than the diplomatic language normally accompanying defence cooperation. He described the arrangement as technically the same as NATO’s Article 5 principle of collective defence. More importantly, Fidan disclosed something about its intended institutional evolution. A ministerial committee resembling NATO’s structure is to be created, a permanent secretariat will be established in Saudi Arabia, and President Recep Tayyip Erdoğan does not envisage an organisation permanently confined to its three founding members. Egypt is already being mentioned as a possible entrant. The question we raised immediately after Makkah has therefore acquired greater urgency: are we witnessing the embryonic formation of an Islamic NATO? The answer requires more caution than either celebration or alarm. The Makkah agreement is unquestionably important. Saudi Arabia combines enormous financial and energy resources with a pivotal position in the Arab and Islamic worlds. Türkiye possesses NATO’s second-largest military, an increasingly sophisticated defence-industrial base and strategic access linking Europe, the Black Sea, the Mediterranean and the Middle East. Pakistan is a nuclear-armed state located at the intersection of South Asia, China, Central Asia, Iran and the Arabian Sea. Taken together, the three constitute an unusual coalition of middle powers. Their convergence is also occurring at a moment when the regional order constructed around American predominance is under extraordinary strain. The latest Middle Eastern war has again demonstrated that overwhelming military capability can destroy infrastructure and degrade adversaries without necessarily producing political order. Michael Fuchs recently argued in Foreign Affairs that the United States should finally relinquish its attempt to dominate the Middle East militarily. The proposition is important, but it raises a larger question. If American primacy recedes, what replaces it? International relations offers no reason to assume that withdrawal by a dominant external power automatically produces regional peace. It can produce strategic autonomy. It can equally produce competitive balancing, arms races and struggles among regional powers seeking to fill the resulting space. Makkah Defence Agreement represents both an opportunity and a danger. The opportunity is the emergence of indigenous collective security. For much of the modern history of the Middle East, regional states have depended upon external powers for protection while simultaneously fearing abandonment by those same protectors. Britain once performed this role in the Gulf. The United States subsequently constructed a much larger military architecture based upon bases, arms supplies, bilateral guarantees and partnerships. Dependence created security, but never complete strategic autonomy. Saudi Arabia’s search for alternatives must be understood against this background. Türkiye has followed another path: remaining inside NATO while steadily expanding its capacity for independent action. Pakistan maintains a strategic partnership with China without severing its relationships with Washington, Riyadh or Ankara. These are not states simply changing camps. They are practising what contemporary scholarship increasingly describes as hybrid or non-exclusive alignment: cultivating overlapping relationships rather than accepting the rigid binaries of Cold War alliance politics. This makes Fidan’s second assertion as important as his comparison with Article 5. He insists that Makkah is not directed against Iran or any other country. That principle must survive implementation. An alliance requires deterrence; it does not necessarily require a permanent enemy. If the emerging arrangement becomes an anti-Iran coalition, it will institutionalise one of the Muslim world’s most dangerous fault lines. Iran is not a temporary presence in the Gulf. It is a major civilisation and regional power whose geography cannot be altered by sanctions, regime change strategies or military pressure. Pakistan has particular reason to understand this. Iran is its neighbour. Internal sectarian peace, Balochistan, border security, Afghanistan and regional connectivity all make a permanently hostile Pakistan-Iran relationship strategically irrational. Nor should Makkah become simply the Muslim military response to Israel. The Palestinian question cannot be removed from regional security, as proponents of the Abraham Accords sometimes appeared to assume. Normalisation and economic integration cannot indefinitely substitute for a political settlement guaranteeing Palestinian rights and viable statehood. At the same time, transforming the region into two permanent military camps would hardly produce the peace Palestinians themselves require. The better possibility is, thus, not an Islamic NATO in the literal sense. NATO emerged from the particular conditions of post-war Europe and bipolar confrontation with the Soviet Union. The Muslim world is geographically dispersed, politically heterogeneous and internally divided. Its states have very different relations with Washington, Beijing, Moscow, Tehran and Tel Aviv. Türkiye itself demonstrates the difficulty of imposing a binary model: it would simultaneously belong to NATO and to the emerging Makkah Accord. That apparent contradiction may actually tell us something important about the international order now taking shape. The twenty-first century may be characterised less by fixed blocs than by overlapping arrangements through which middle powers seek room for manoeuvre between larger powers. This is also where geoeconomics becomes indispensable. Saudi finance and energy, Türkiye’s manufacturing and defence technology and Pakistan’s geography, human resources and access towards China, Central Asia and the Arabian Sea could create something considerably more important than another military organisation. Egypt’s eventual participation would add the Suez Canal, the Arab world’s largest population and another major military power. A security structure built around such capabilities could eventually support trade, energy corridors, defence production, technological cooperation, food security and infrastructure connectivity. Without this economic foundation, an Islamic NATO would remain largely an exercise in military coordination. China will watch these developments closely. Beijing requires Gulf energy, values Iran, has deep interests in Pakistan and maintains substantial economic relations across the Middle East. It is unlikely to wish to inherit America’s expensive role as regional military hegemon. A regional arrangement capable of providing stability without forcing states into an

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