As of March 2023, Pakistan’s total foreign debt was estimated at USD 125.7, according to the US State Department figures. Despite borrowing sums of money, some countries still manage to be financially stable owing to the fact that they themselves are net creditors as well. On the other hand, if a country is unable to pay its foreign debt, it is said to be at a risk of default. Pakistan on various occasions witnessed proximity to defaulting but the situation was mostly handled with emergency grants. Permanent dependence on foreign loans has led Pakistan into a ‘debt trap’, that involves borrowing more money to settle previous loans.

Historically, political developments impacted the inflow of grants in the country. From 1951-1955, Pakistan received $121 million in the form of foreign aid. However, with tensions soaring up in the cold war era, foreign aid almost tripled. Interestingly, aid lessened during 1965 and 1971 wars and went up again at the time of Soviet-Afghan War. Foreign aid declined again in the 1990s due to Pakistan’s resolve to develop a nuclear program. Pakistan again found itself at the center of geopolitics after the 9/11 incident that led to the US invasion of Afghanistan. This development resulted in unprecedented influx of US aid and IMF grants.

The composition of Pakistan’s external debt comprises Multilateral debt, Paris Club debt, private and commercial loans, and Chinese bilateral debt. Multilateral debt borrowed from the International Monetary Fund (IMF) is $7.6 billion, World Bank (WB) is $18 billion, Asian Development Bank (ADB) is $15 billion and smaller amounts from Asian Infrastructure Investment Bank (AIIB) and Islamic Bank. Paris Club involves 22 creditor countries; however, major lenders are Japan, United States, United Kingdom, Germany and France. Private Debt and Commercial loans are mostly in the form of private bonds including Eurobonds and global Sukuk bonds (7.8 billion dollars), while commercial loans primarily taken from Chinese financial institutions. Fourth major creditor of foreign debt to Pakistan is Chinese bilateral loans which amount to USD 27 billion.

The US has always been the most significant donor for Pakistan. The Congressional Research Centre estimated that the US has provided direct help worth nearly $50 billion since 1951. By providing Pakistan with at least $1.5 billion per year in development programs, the Kerry-Lugar Bill (2010), ensured that American assistance would continue beyond this time frame as well. Pakistan is a regular client of the IMF, a global organization that also serves as a lender to nations. Since 1984, the IMF has disbursed more than $10 billion. The current increase is a result of a deal Pakistan and the IMF made to stop Pakistan’s balance of payments issue. Pakistan has recently struggled to cover more than a few months’ worth of imports since its dollar reserves are frequently depleting. IMF lends loans to Pakistan under specific terms in order to keep it from defaulting. These requirements essentially enlarge Pakistan’s tax base, raise revenue, privatize, deregulate, and are intended to pressure Pakistan to adopt economic reforms that have led to controversies within Pakistan. Foreign aid can occasionally be a misnomer; practically all of Pakistan’s ‘aid’ must be repaid. Pakistan has been spending sums of money in debt servicing. In 2004, debt servicing was particularly expensive due to Pakistan’s $1.4 billion repayment to the Asian Development Bank. In fact, Pakistan spent almost $11.5 billion this year, almost quarter of its annual budget, on debt servicing, which includes both domestic and foreign debt. Therefore, these payments consume valuable resources.

Pakistan needs to borrow in order to pay back, often within the same year. The net aid Pakistan receives every year (after debt servicing is taken into account) is a fraction of the money that originally comes in. In fact, in some years there has been a net outflow, when more money actually went out of Pakistan than what came in. The net aid Pakistan received from 1990-2007 on average was only 15% of the aid Pakistan actually received. A look at this chart shows a healthy decrease in debt during the early 2000s.  As of November 1, 2001, Pakistan owed the Paris Club $13 billion. Then the war on terror started and America needed Pakistan’s help to fight it. So it was decided that the debt will be repaid after 15 years (the first payment will be made in 2017). Despite external debt relief, Pakistan’s continued failure to manage its economy led to a sharp increase in domestic debt, which more than doubled between 2009 and 2013 and then in 2015 under the PPP government. However, Pakistan’s foreign debt is increasing year by year, putting fragile state of its economy under pressure. According to the stats provided by macrotrends, Pakistan external debt for 2018 was a 8.25% increase from 2017. Similarly, 8.73%, 7.24%, 12.74% was the increase in external debts from year 2019, 2020 and 2021 respectively.

There is unpretentious risk that Pakistan, a country with nuclear weapons and a population of close to 230 million, is able to pay-off its debt. Pakistan needs the IMF’s ongoing assistance as well as cooperation from its Middle Eastern and Chinese allies to avert this situation. The Pakistani leadership has been pleading with the US to intervene with the IMF, but their request hasn’t had the desired results. In the event that Pakistan defaults, there will be a series of upsetting consequences. Additionally, there may be a disruption in Pakistan’s imports, which may result in a lack of some necessities like goods and commodities. Sharif’s administrations and Khan are already engaged in a bitter political struggle in Pakistan, and the country may experience further political unrest as a result of the economic crisis. The ensuing crisis might also take unexpected turns given Pakistan’s demographics and rising terrorism risks.