Why a Large Debt-Servicing Burden Has Become a Brake on Pakistan's Economic Growth
The debate over Pakistan's public debt is often framed in moral or political terms. Yet the most compelling case against an excessive debt burden is not ideologicalโit can be demonstrated in purely logical and economic terms.
At its core, economic growth depends on a country's ability to increase the productive capacity of its economy. In standard macroeconomic models, long-term growth is driven by the accumulation of physical capital, improvements in human capital, technological progress, and productivity gains. Government policy influences all four.
A large debt-servicing burden directly undermines this process.
The starting point is the national income identity:
GDP = C I G (X โ M)
where C is consumption, I is investment, G is government spending, and X โ M is net exports.
Not all government spending contributes equally to growth. Spending on education, health, infrastructure, research, and technology raises future productive capacity. Debt servicing does not. Interest payments merely transfer income from taxpayers to creditors. They do not build roads, educate workers, improve logistics, or increase productivity.
As debt servicing consumes a growing share of government revenue, it crowds out productive expenditure.
The budget constraint facing a government can be expressed as:
Revenue = Debt Service Current Expenditure Development Expenditure Defence Other Spending
When debt service expands faster than revenue, something else must shrink. In practice, development spending is usually the first casualty because salaries, pensions, subsidies, and security expenditures are politically difficult to reduce.
The result is lower public investment.
This matters because investment is one of the most important determinants of long-term growth. In the Solow growth model, output is determined by:
Y = A ร F(K,L)
where Y is output, A is productivity, K is capital, and L is labour.
Growth occurs when the capital stock expands and productivity improves. Public investment contributes to both. Infrastructure lowers business costs. Education raises worker productivity. Technology investments increase efficiency.
Debt servicing contributes to none of these variables.
The damage extends beyond public finances.
When governments borrow heavily from domestic banks to finance fiscal deficits, they absorb a large share of available savings. This creates the classic "crowding-out" effect. Private firms find less credit available, or face higher borrowing costs.
In macroeconomic terms:
National Savings = Public Savings Private Savings
A large fiscal deficit reduces public savings. Lower national savings mean less funding is available for productive private investment.
Lower investment today translates into a smaller capital stock tomorrow, reducing future growth.
The arithmetic becomes particularly severe when interest rates exceed economic growth rates.
Debt dynamics can be summarized by the equation:
ฮ(Debt/GDP) โ Primary Deficit (r โ g)(Debt/GDP)
where:
r is the effective interest rate on government debt,
g is nominal GDP growth.
If the interest rate exceeds the growth rate, debt tends to rise relative to GDP even without large new borrowing.
This creates a vicious cycle.
Higher debt leads to higher interest payments. Higher interest payments increase borrowing requirements. Additional borrowing raises debt further. More debt generates even larger interest obligations.
Eventually, fiscal policy becomes dominated by debt management rather than economic development.
The consequences are visible in many heavily indebted economies. As debt service absorbs fiscal space, governments struggle to invest in human capital, infrastructure, innovation, and institutional capacityโthe very factors that determine long-run growth.
The opportunity cost is enormous.
Consider two countries with identical tax revenues. One spends 40 percent of revenue on debt service and 10 percent on development. The other spends 10 percent on debt service and 40 percent on development. Over time, the second country accumulates better infrastructure, a more skilled workforce, stronger institutions, and higher productivity. The growth differential compounds year after year.
This is why excessive debt servicing is not merely a fiscal problem. It is a growth problem.
A country cannot borrow its way to sustained prosperity if an ever-larger share of its resources is devoted to servicing old obligations rather than creating new productive capacity. The mathematics of growth are unforgiving: economies expand when resources are invested in capital, people, and technology. When those resources are diverted to debt service, future growth is sacrificed to pay for the past.
That is the fundamental challenge facing heavily indebted economies. The issue is not debt itself. Debt can finance growth-enhancing investments. The problem arises when debt becomes so large that servicing it crowds out the very investments needed to generate growth. At that point, debt ceases to be a tool of development and becomes an obstacle to it.