Debt crisis in Pakistan

  • Huge debts have been passed down over generations in Pakistan.

Pakistan originally became highly indebted in the 1970s, when the government borrowed to cope with the impact of high oil prices. Ever since, the people have suffered from a large external debt. The response to this debt crisis has been to continuously obtain bailout loans from the International Monetary Fund (IMF). For 32 of the last 44 years, Pakistan has received loans from the IMF, one of the most sustained periods of lending to any country. However, Pakistan today continues to have a large external debt, inequality is entrenched, and the country failed to meet most of the Millennium Development Goals.

Between 1990 and 2016, external government debt payments averaged 16% of government revenue, more than public spending on health care. However, despite being impoverished and heavily indebted, the country was excluded from the IMF and World Bank HIPC debt relief scheme for arbitrary reasons, but in reality because as a large country debt cancellation would cost lenders more than in smaller countries.

The bailout loans have resulted in the debt being passed down generations, giving the IMF an enormous power over Pakistan’s development, through the economic conditions the institution has placed upon the country. Lending and grants have also been a means to prop-up various military governments in Pakistan supported by the western world. This has included the regimes of General Musharraf (2000-2008) and Zia-ul-Haq (1978-1988). Assistance, especially from the US and the Western world, has been in return for military government general support during the Cold War, Pakistan support for Afghan fighters against Soviet occupation, and during the ‘war on terror’.

Through the 1980s and 1990s Pakistan increased VAT at the behest of the IMF, whilst reducing taxes on imports. As a percentage of tax revenue, sales taxes in Pakistan increased from 7% in 1980 to almost 30% by 2000. Overall taxes increased by 7% for the poorest households, whilst falling by 15% for the richest. Yet in 2010, the IMF was once again pushing the Pakistan government to increase VAT. Shahid Hassan Siddiqui from the Research Institute of Islamic Banking said in 2010 that IMF tax conditions would “hurt the poor”.

Pakistan has also received much ‘aid’ in the form of loans. Between 1998 and 2005, the World Bank, Asian Development Bank and Japanese government lent over $500 million for a National Drainage Program. The project was supposed to improve Pakistan’s irrigation system. However, following complaints by local people in the Sindh region, a World Bank Inspection Panel found that the project had led to widespread environmental harm and suffering among local communities, violating six of the World Bank’s safeguard policies. In 2003, increased flooding, partially caused by the project, claimed more than 300 lives. Over $100 million of interest and principal has been repaid on the loans so far, with hundreds of millions still to be paid.

As well as a large debt, Pakistan has huge development challenges, which are contributing to instability in the region. Since 2010, the country has been classified as ‘middle income’. However, its national annual income per person is only £1,100. Pakistan failed to meet 6 out of 7 Millennium Development Goals by 2015.

Pakistan’s debt burden increased again from 2008 because of the disastrous floods in 2010, and the impacts of the global financial crisis, such as the rise in the cost of imported oil. The government’s external debt reached $59 billion by 2016. In 2017, Pakistan has used-up 20% of its foreign currency reserves to try to defend the value of the rupee. If it does have to devalue, this will rapidly increase the size of external debt payments, but it also cannot keep using up the currency reserves. There is talk of yet another IMF bailout, rather than the debt restructuring and relief which has been essential for many years.

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