LAHORE:
The fragile external financing system of Pakistan is one of the main reasons for the weak economic structure of the country, as heavy reliance on foreign loans continues to expose the economy to sudden shocks, business leaders and economists said.
They added that the external debt profile remains tilted towards short-term borrowing, leaving little room for policy mistakes. “The government must immediately begin serious negotiations with friendly nations to secure longer repayment periods and ease pressure on foreign exchange reserves,” said Raja Waseem Hassan, Vice Chairman of the Pakistan Industrial and Traders Associations Front (PIAF).
According to Hassan, without extending the maturity of loans, the risk of recurring balance-of-payments stress will continue to haunt the economy.
Official data shows that Pakistan’s total external debt and liabilities stood at around $134.5 billion as of September 2025, with a significant portion either short-term or maturing within a few years. Foreign exchange reserves have improved and crossed the $21 billion mark in January 2026; however, inflows from multilateral institutions and friendly countries are providing temporary support, while repayment obligations will remain heavy throughout 2026 and beyond.
Hassan said recent diplomatic developments, including closer ties with Gulf states, reports of potential Saudi and UAE investment, and improving relations with the United States, are positive signals. However, he cautioned that geopolitical alignments can shift quickly. “Economic strength must be the real shield. Without strong buffers and self-reliance, external partnerships alone cannot guarantee stability,” he added.
He pointed out that a neighbouring regional economy managed to negotiate better trade terms during Trump-era tariff pressures because it had stronger reserves and export diversification. In contrast, limited export growth and a narrow industrial base have reduced Pakistan’s bargaining power.
Pakistan’s exports remained around $32 billion in FY25, far below potential, while imports continued to outpace export earnings despite compression measures. The trade deficit, though reduced from previous highs, still poses structural challenges.
Dr Saleem Ahmed, a senior economist, said the economy cannot depend on rollovers and short-term deposits forever. “Debt maturity extension should be treated as a strategic priority, not a temporary fix. At the same time, structural reforms in taxation, energy pricing and industrial productivity are essential to reduce external dependence,” he said.
According to Ahmed, sustainable growth of at least 5-6% annually is required to stabilise the debt-to-GDP ratio, which has remained close to 70% in recent years.
Economic growth has remained modest. The International Monetary Fund (IMF) has projected GDP growth of around 3.6% for FY26 under a stabilisation scenario, whereas the State Bank of Pakistan (SBP) is projecting growth in the range of 3.75-4.75%. While inflation has eased from its peak of around 38% in 2023, high borrowing costs and tighter monetary policy have slowed industrial expansion. Private sector credit growth has remained weak, reflecting cautious business sentiment.
Hassan stressed that the present moment offers an opportunity. With global supply chains gradually shifting and regional connectivity projects under discussion, there is room to reposition exports and attract investment. He argued that military and strategic importance can enhance diplomatic leverage, but without economic competitiveness, it cannot translate into lasting prosperity.
Both speakers stressed the need for better resource allocation within the domestic economy. They emphasised investment in export-oriented sectors such as textiles, information technology, agricultural processing and light engineering. Improving tax collection without overburdening existing taxpayers, reducing energy losses and promoting value-added exports were identified as immediate priorities.
They also expressed hope that policymakers will design contingency plans to reduce reliance on external borrowing. Expanding the tax base, focusing on value addition in export-oriented items, encouraging remittance inflows, which, according to the SBP, are expected to reach $42 billion in FY26, and boosting foreign direct investment beyond the modest $1.5-2 billion annual levels were seen as crucial steps in this regard.
