Crowding out development for debt: Pakistan's fiscal dilemma

Business Recorder

3 days ago

Over the past fifteen years, Pakistan's federal budget has ballooned in size, but not necessarily in wisdom. From 2009-10 to the upcoming fiscal year 2025-26, the national budget has grown nearly sevenfold in nominal terms.
At first glance, that sounds like a sign of progress. But look under the hood, and a troubling story unfolds - one where the lion's share of that growth is being swallowed by interest payments on debt, leaving little room for investments that actually move the needle on development.
Let's put the headline numbers into perspective. In 2009-10, Pakistan spent about 28% of its federal budget servicing debt.
In 2025-26, that figure is projected to reach a staggering 46.7%, with PKR 8.21 trillion earmarked for debt servicing. That means more than half of every rupee in the national budget will go toward paying interest - mostly on domestic borrowing (in outgoing fiscal year, it was actually around 52%).
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In contrast, spending on the federal development program (PSDP) has plunged from around 27.5% of the budget to just 5.69%. That's not just a fiscal shift; it's a strategic retreat from the future.
The numbers don't lie. Since 2009–10, interest payments have increased from under PKR 700 billion to PKR 8.2 trillion - an increase of over 1000% - while development spending has only marginally risen from approximately PKR 421 billion to PKR 1.287 trillion, a far more modest growth of 205%.
Even after accounting for inflation and rising - in favor of meeting mounting debt obligations. Although defence spending is often a political lightning rod in budgetary debates, its share of the national budget declined in recent years - from 14.6% to 11.6% - despite substantial growth in absolute terms.
However, it has risen again to 14.5% in the 2025–26 budget.
The above-mentioned situation is not just a budgeting issue; it's a symptom of a much deeper problem in Pakistan's fiscal architecture. The government is caught in a debt spiral, where borrowing begets more borrowing, and interest costs cannibalize public finances. And this isn't just some abstract macroeconomic concern.
When the government spends over 8.21 trillion PKR on interest payments but only 1 trillion on development (PSDP), the effects are visible in potholes that don't get fixed, schools that don't get built, and hospitals that remain understaffed and under-resourced.
What makes this fiscal scenario particularly pernicious is how it affects the future. Development spending is not just about concrete and contracts, it's about human capital, infrastructure, innovation, and resilience. It's the bridge between today's challenges and tomorrow's opportunities.
When development is consistently underfunded, it isn't just growth that slows; it's hope that erodes.
Let's take education as an example. Without adequate public investment, education outcomes stagnate or deteriorate. A population that isn't skilled or productive becomes less competitive globally and more vulnerable domestically. Add healthcare to the mix - where public sector hospitals are already struggling - and you see the real cost of fiscal mismanagement: a weaker, sicker, and more unequal society.
And here's the twist: even if you doubled development spending tomorrow, the impact would be limited unless the structural drivers of this debt crisis are addressed. Domestic borrowing dominates Pakistan's debt profile, and it's an expensive habit - particularly when the central bank keeps interest rates high to tame inflation.
That, in turn, jacks up the cost of debt servicing even further, creating a vicious cycle. And let's not forget the crowding-out effect: when government borrowing soaks up capital in the domestic financial markets, there's less credit available for the private sector. That means fewer investments, fewer jobs, and slower economic dynamism overall.
It's a policy maze, but not an unsolvable one. The first step is to acknowledge the elephant in the room: Pakistan needs a serious debt management strategy. Not just another patchwork rescheduling or a short-term IMF fix, but a comprehensive roadmap that involves restructuring terms, limiting non-productive borrowing, and - crucially - ensuring that new debt is used to finance investments with real economic returns.
At the same time, there's a desperate need for tax reform. Pakistan's tax-to-GDP ratio remains dismally low, and the burden is disproportionately borne by those already in the formal economy.
Broadening the tax base - by bringing informal sectors and elite exemptions into the fold - is politically tough but economically indispensable. Without more robust and equitable revenue generation, the development squeeze will only tighten.
Rationalizing expenditures is another part of the puzzle. While subsidies may be politically expedient, they're often poorly targeted and fiscally toxic. The FY2025-26 subsidy bill is expected to hit Rs1.18 trillion, slightly higher than the entire PSDP allocation. If even a portion of that could be redirected towards health, education, and infrastructure, the impact could be transformative.
But perhaps the most sobering takeaway from this analysis is the intergenerational unfairness built into our current fiscal structure. We're borrowing today to pay for yesterday's spending, while leaving today's citizens - and tomorrow's workforce - with decaying infrastructure, low-quality public services, and limited economic mobility. In many ways, it's a quiet betrayal of the country's youth.
This is why Pakistan's budget crisis is not just about numbers. It's about national priorities and the values they reflect. When more than half of public funds are spent on interest payments, it signals a government that is stuck servicing the past rather than building the future. When development gets only 5.7% of the pie, it signals a political economy that is risk-averse, reactive, and inward-looking.
So, what's the way forward? We need a paradigm shift - a fundamental rethinking of what public finance is for. It's not enough to balance books. We need to balance our opportunity. That means aligning fiscal policy with development objectives.
It means investing in projects that boost productivity, generate employment, and reduce long-term fiscal pressure. And it means building the kind of institutional capacity that ensures public money is not just spent but spent wisely.
Pakistan's economic destiny will not be decided by how much we borrow, but by how we invest. We still have a chance to change course, but the window is narrowing. For too long, we've accepted a fiscal model that prioritizes survival over progress. It's time to flip the script.
Because development isn't just another budget line item. It's the story we write for our future.
The article does not necessarily reflect the opinion of Business Recorder or its owners