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Pakistan’s recent economic history shows why it has been so difficult to service the external debt and why this will continue to be a challenge in the future. First, external debt has not been used to expand public investment for many years now; instead, it has largely supported government consumption. Second, the ability to service the debt has been weakened by poor export performance. And while maintaining external balance has been helped by the growth of remittances, this very growth has also generated pressure on the exchange rate to appreciate, thereby undermining the incentive to export. Third, the pro-consumption bias of the external debt has been exacerbated by the increasing reliance on quick-disbursing funds provided by international financial institutions to promote policy reforms and rebuild international reserves. Fourth, debt terms have been deteriorating for a while as interest rates applicable to Pakistan have risen.

United statesAziz khanLizza malikParis school of economicsConsortium for development policy researchDevelopment labWorld development indicatorsInternational debt statisticsAsian development bankWorld bank sourceWorld bankInternational monetary fundDevelopment policy researchWorld developmentInternational monetaryAsian development