Debt, Energy, and Growth: A Vicious Cycle in Pakistan

Pakistan’s economy has long struggled with a combination of high public debt, recurring energy crises, and unstable economic growth. These problems are often discussed separately, yet in reality they are deeply interconnected. Rising debt weakens the government’s ability to invest in energy infrastructure, poor energy performance reduces industrial productivity and growth, and weak economic growth forces the country to rely on more borrowing. This creates a vicious economic cycle that continues to hinder Pakistan’s development and macroeconomic stability.

Today, Pakistan faces one of the most difficult economic environments in its history. Inflation remains high, foreign exchange reserves are under pressure, and industrial growth has slowed significantly. At the center of these challenges lies the debt-energy-growth nexus, a structural issue that successive governments have failed to resolve sustainably.

Rising Debt and Fiscal Stress

Over the past decade, Pakistan’s public debt has increased rapidly due to persistent fiscal deficits, external borrowing, currency depreciation, and low domestic revenue generation. According to the State Bank of Pakistan (SBP), public debt has consistently remained above 70 percent of GDP in recent years. Debt servicing alone consumes a major portion of the federal budget, leaving little fiscal space for development spending.

A significant part of government revenue is now used to pay interest on domestic and external loans. As debt repayments increase, spending on critical sectors such as education, health, infrastructure, and energy declines. This creates a situation where the government continuously borrows not for development, but merely to repay previous loans and manage fiscal operations.

Pakistan’s dependence on external lenders, including the International Monetary Fund (IMF), the World Bank, and bilateral creditors, has also increased. While these loans provide short-term relief, they often come with strict fiscal adjustment conditions such as subsidy reductions, currency devaluation, and higher utility prices. Although these measures may stabilize the economy temporarily, they also increase economic hardship and slow domestic growth.

Another major issue is currency depreciation. Since much of Pakistan’s external debt is denominated in dollars, every fall in the value of the rupee increases the debt burden. In recent years, the Pakistani rupee has weakened significantly against the US dollar, making external repayments more expensive and further worsening fiscal stress.

Pakistan’s Energy Crisis

The energy sector remains one of the largest structural weaknesses of Pakistan’s economy. Despite having considerable installed electricity generation capacity, the country continues to face power shortages, inefficiencies, and high electricity costs.

The most serious issue within the energy sector is circular debt, which has crossed PKR 2.5 trillion. Circular debt refers to the chain of unpaid obligations within the power sector. Electricity distribution companies fail to recover full payments from consumers, which limits their ability to pay power producers. As a result, the government must provide subsidies or loans to keep the system functioning.

Several factors contribute to this problem:

• High transmission and distribution losses
• Electricity theft
• Poor governance of distribution companies
• Delayed tariff adjustments
• Expensive imported fuel-based power generation

Pakistan heavily relies on imported oil, coal, and LNG for electricity production. This dependence makes the economy vulnerable to fluctuations in international energy prices. During the global energy price surge following the COVID-19 pandemic and the Russia-Ukraine conflict, Pakistan’s import bill increased sharply. The country struggled to finance energy imports, leading to fuel shortages and increased electricity tariffs.

High electricity prices have become a major burden on households and industries alike. Manufacturing firms face rising production costs, making Pakistani exports less competitive in international markets. Frequent power outages and load shedding further reduce industrial productivity and discourage investors.

Small and medium enterprises are particularly vulnerable because many cannot afford alternative energy sources such as generators or solar systems. Consequently, industrial output declines, unemployment rises, and economic growth slows.

The Impact on Economic Growth

Economic growth in Pakistan has remained volatile for decades. While the country occasionally experiences short periods of high growth, these phases are rarely sustainable. Structural weaknesses in the economy prevent long-term stability.

The energy crisis directly affects growth by reducing industrial efficiency and investment. Factories cannot operate at full capacity when electricity supply is unreliable. Businesses face uncertainty regarding production schedules and operating costs. Foreign investors also hesitate to invest in an economy where energy availability remains inconsistent.

Agriculture, which contributes significantly to Pakistan’s GDP and employment, is also affected by energy shortages. Farmers rely on electricity and fuel for irrigation, machinery, and transportation. Rising energy prices increase agricultural production costs, contributing to food inflation and reducing rural incomes.

At the same time, high debt limits the government’s ability to stimulate economic activity. Instead of investing in infrastructure, technology, and human capital, a large portion of public funds goes toward debt servicing. This reduces the economy’s productive capacity over time.

Low economic growth creates another problem: declining government revenues. When industries slow down and unemployment rises, tax collection falls. Pakistan already has one of the lowest tax-to-GDP ratios in the region. Weak growth further reduces the government’s ability to generate revenue, forcing it to borrow even more to finance expenditures.

This creates a dangerous cycle:

• High debt reduces development spending
• Poor investment worsens energy infrastructure
• Energy shortages reduce industrial productivity
• Low productivity slows economic growth
• Slow growth reduces tax revenues
• Lower revenues increase borrowing needs

As borrowing rises again, the cycle repeats itself.

Social Consequences of the Crisis

The debt-energy-growth crisis is not only an economic issue; it also has severe social consequences. Rising electricity and fuel prices increase the cost of living for ordinary citizens. Inflation erodes purchasing power, pushing more households into poverty.

Unemployment and underemployment also rise when industries reduce production. Young people entering the labor market face limited opportunities, contributing to frustration and brain drain as skilled workers seek employment abroad.

The burden of adjustment policies often falls disproportionately on low- and middle-income groups. Subsidy reductions and utility price increases may improve fiscal indicators, but they also increase social inequality and economic insecurity.

The Way Forward

Breaking Pakistan’s debt-energy-growth cycle requires long-term structural reforms rather than short-term crisis management.

First, the government must reform the energy sector by reducing transmission losses, improving governance of distribution companies, and encouraging investment in renewable energy. Pakistan has enormous potential in solar, wind, and hydropower, which can reduce dependence on imported fuels.

Second, fiscal reforms are essential. Pakistan needs to broaden its tax base, reduce untargeted subsidies, and improve public financial management. Increasing domestic revenue collection can reduce dependence on external borrowing.

Third, industrial and export policies must focus on productivity and competitiveness. Stable energy supply, investment-friendly regulations, and technological modernization can help revive manufacturing growth.

Finally, political stability and institutional continuity are critical. Economic reforms cannot succeed without consistent implementation and public trust.

Conclusion

Pakistan’s debt, energy, and growth problems are interconnected parts of a deeper structural crisis. High debt limits investment, energy inefficiencies weaken productivity, and low growth increases borrowing needs. Together, these factors create a vicious cycle that continues to undermine economic stability and development.

Breaking this cycle will require difficult but necessary reforms in fiscal policy, energy governance, and economic management. Without structural change, Pakistan risks remaining trapped in recurring economic crises. However, with effective policymaking, institutional reform, and sustainable investment, the country still has the potential to achieve long-term economic stability and inclusive growth.

The views expressed in this article are solely those of the author and do not necessarily reflect the views of The Opinion Desk.