The Persistent Cycle of Borrowing and IMF Dependency
Pakistan has remained trapped in a cycle of borrowing, bailouts, and conditionality for decades. Despite occasional signs of stability, the country’s reliance on the International Monetary Fund (IMF) has only deepened. This dependency is now deeply embedded in Pakistan’s budget and policy framework, driven by structural, political, and economic factors.
Escalating Public Debt
Public debt has become a critical issue, with the total amount reaching Rs 80.5 trillion by June 2025—an increase of 13% year-on-year. Of this, approximately Rs 54.5 trillion is domestic, while Rs 26 trillion is external. External debt in US dollar terms surged to USD 134.97 billion in Q2 2025, up from USD 130.18 billion three months earlier. In rupee terms, external liabilities reached Rs 23.417 trillion, an increase of Rs 1.663 trillion compared to the previous year. These figures highlight a debt structure that makes Pakistan particularly vulnerable to exchange rate fluctuations, global interest rate increases, and external market shocks.
The Challenge of Breaking the IMF Chain
Breaking free from the IMF chain is difficult due to several key reasons:
1. Debt Servicing Consumes Significant Resources
A large portion of government revenues is already allocated to debt servicing. For FY 2025-26, the federal budget allocates Rs 8.2 trillion for interest and principal payments—nearly 46.7% of planned expenditures. External debt servicing obligations amount to approximately USD 23 billion during the same period. When half the budget is used to repay creditors, there is little left for infrastructure, education, healthcare, or growth stimulation.
2. Weak Economic Growth
Growth remains insufficient to reduce the debt burden. The IMF projects a GDP growth rate of 2.7% for 2025, which is not enough to absorb labor force growth or generate high employment. Inflation near 18% and a weak rupee between Rs 280-285 per USD exacerbate the cost of living and external debt repayment. A weaker rupee increases the local-currency cost of foreign-denominated debt, while inflation reduces government revenues and increases demands for higher public spending on subsidies and social welfare.
3. Narrow and Inefficient Revenue Base
Despite repeated IMF mandates, Pakistan’s tax-to-GDP ratio remains below 10%, among the lowest in South Asia. Key sectors like agriculture, real estate, and wholesale trade remain under-taxed or evade compliance. As revenue collection fails to keep up, deficits grow, and the country borrows more. Much of this borrowing comes from short-term debt instruments at high interest rates, creating refinancing risks.
4. High Costs of IMF Conditionality
The latest IMF programs require Pakistan to implement reforms such as cutting subsidies, raising taxes, and rationalizing energy tariffs. While these measures are necessary for macroeconomic stability, they often hit low-income households hardest, leading to public discontent. Governments tend to delay or partially implement these measures, weakening the effectiveness of reform commitments.
5. Structural Inefficiencies
Structural inefficiencies persist in critical areas. The energy sector’s circular debt has ballooned past Rs 2.7 trillion, draining public resources. Power distribution suffers from transmission losses, theft, and delayed bill collection. Public sector enterprises continue to operate at a loss. Exports remain concentrated in textiles and low-value goods, resulting in a trade deficit of roughly USD 22 billion.
6. Vulnerability to External Shocks
External shocks such as global interest rates, commodity prices, currency fluctuations, and climate events further weaken fiscal stability. Even modest depreciation of the rupee inflates foreign-denominated debt costs. Oil price spikes quickly translate into inflation and drag on the trade balance.
7. Reactive Policymaking
Policymaking in Pakistan remains reactive rather than strategic. There is limited political consensus for reforms, and each government inherits the legacies of its predecessors. Legislative and administrative structures for long-term reforms lag, making it difficult to implement systemic changes.
8. Unfavorable Global Environment
The global environment has become less favorable for Pakistan. Major creditors face their own fiscal pressures, and multilateral lenders impose stricter conditions. Bilateral lenders are less willing to provide new loans, and private credit markets are less forgiving for high-risk governments.
Conclusion: A Strategic Shift Is Needed
These factors collectively explain why Pakistan cannot break free from the IMF chain. Stabilizing inflows, staff-level agreements, and ad-hoc repayments help delay crises but do not address the core drivers of debt: weak revenue, inflation, exchange rate risk, structural inefficiency, and political resistance to necessary reforms.
Unless Pakistan enacts bold, systemic changes—including broad tax reform, structural reform of state enterprises, energy sector overhaul, export diversification, and political consensus—it will continue to depend on external rescue packages. The cost of delay is a cycle of rising debt, limited growth, and policy constraints.
In short, breaking the IMF chain is not a technical adjustment—it is a strategic shift. Until Pakistan moves from borrowing to producing, from debt servicing to investing, the country will remain tethered to external finance. For now, that chain is both a burden and a ballast—and only by choosing reform over rhetoric can Pakistan transform it into a bridge, not a fetter.
