Debt restructuring: A necessary disruption to Pakistan’s elite capture

In the intricate web of Pakistan’s economic challenges, debt restructuring stands out as a crucial test of political will. With ballooning obligations suffocating fiscal space, the need for both domestic and external restructuring has become inescapable. Yet resistance to this vital reform does not stem from economic impracticality— it is rooted in the entrenched interests of the elite who dominate the country’s financial and political systems.

The reluctance to tackle domestic debt is particularly revealing. Restructuring threatens to upend the privileged status quo, dismantling rent-seeking arrangements that have enriched a select few at the expense of national economic vitality. As a result, the topic remains taboo, cloaked in alarmist narratives.

For decades, Pakistan has relied on debt to paper over structural inefficiencies, funding politically expedient but unproductive expenditures. The consequences are now clear: debt service obligations are crowding out critical public investments in education, health care, and infrastructure.

Domestic debt, which accounts for more than two-thirds of public debt, is held primarily by commercial banks. These institutions earn risk-free returns on government securities, diverting credit away from the private sector and stifling economic dynamism. Any suggestion to extend maturities or impose haircuts is met with fierce resistance, as they threaten the lucrative arrangements that sustain elite power. Financial institutions, heavily influenced or controlled by the elite, profit immensely from the state’s debt addiction. Any disruption to this nexus jeopardizes rents and dividends, exposing the fragility of the economic order.

Opponents of restructuring warn of financial chaos, but such alarmism ignores the potential benefits of a well-managed process. Economist Joseph Schumpeter’s concept of “creative destruction” aptly captures the opportunity debt restructuring offers: inefficient financial and industrial practices must adapt or perish, paving the way for innovation and growth.

Nowhere is this truer than in Pakistan’s industrial sector, which has long relied on subsidies, protectionist tariffs, and state patronage. Sheltered from competition, many industries have grown complacent, prioritizing government support over market performance. Redirecting resources to high-potential sectors— such as information technology, renewable energy, and value-added agriculture— could ignite economic renewal. South Korea and Taiwan faced similar crossroads, dismantling inefficiencies and investing in advanced manufacturing and technology. Pakistan must pursue a similarly bold strategy, leveraging restructuring to attract inward investment from the Gulf and other global stakeholders. This is more likely to succeed than offering special incentives that distort the competitive landscape.

The cost of inaction is steep. Interest payments already consume an outsized share of government revenues, leaving little room for essential public spending. The cycle of borrowing to repay debt perpetuates economic instability and undermines social cohesion. Worse, without restructuring, Pakistan risks an eventual default— a scenario far more damaging than any temporary disruptions caused by reform.

Pakistan must pursue a bold strategy, leveraging restructuring to attract inward investment from the Gulf and other global stakeholders.

Javed Hussain

The IMF’s latest bailout, Pakistan’s 22nd program, projects growth of 4.5 percent by 2027 and a primary fiscal surplus of 2 percent. Such targets hinge on growth rates well above historical norms and fiscal discipline that has proved elusive. More troublingly, the burden of meeting these targets risks falling disproportionately on lower and middle-income citizens, exacerbating inequality.

Lessons from other nations illustrate both the challenges and rewards of debt restructuring. Greece, for example, renegotiated debt terms with private creditors and international institutions, extending maturities and reducing interest rates. Sri Lanka recently restructured its International Sovereign Bonds (ISBs) by exchanging their existing bonds for new instruments with haircuts, lower interest rates, and extended maturities. Moreover, payments after 2028 will be tied to Sri Lanka’s economic performance. If the economy outperforms IMF projections, bondholders receive higher payments; underperformance will trigger further haircuts​. Pakistan can draw on these examples to craft a strategy that balances fiscal relief with growth imperatives.

However, debt restructuring must be part of a broader reform agenda. Expanding the tax base, curbing wasteful expenditures, and tackling corruption are essential to building confidence among stakeholders. Addressing the power sector’s mounting liabilities— which have made electricity tariffs unaffordable for households and rendered industries uncompetitive— is equally critical.

Deregulation, coupled with investment in human capital, can redirect resources from stagnant sectors to innovation and productivity. Global support, particularly from Gulf countries that have played a pivotal role in IMF bailouts, could provide the technical and financial assistance needed to sustain these reforms.

To mitigate short-term disruptions, the government must implement robust social protection programs and establish empowered fiscal oversight agencies to prevent a recurrence of fiscal indiscipline.

Debt restructuring is no panacea, but it is an essential step toward stabilizing Pakistan’s economy and achieving sustainable growth. Opposition to these reforms reflects not economic prudence but fear of disrupting elite privileges. The burden of adjustment will fall on the creditors rather than the public and mark a much-needed redistribution of resources in Pakistan.

The stakes could not be higher. Pakistan must summon the political courage to act decisively. History has shown that bold reforms, though often contentious, pave the way for transformative progress. 

–Javed Hassan has worked in both the profit and non-profit sectors in London, Hong Kong, and Karachi. He tweets as @javedhassan.