Pakistan’s fiscal budget 2024-25 comes at a time when the country is struggling with debt obligations. There lies a critical challenge of balancing the debt servicing with development spending. This trade-off is faced by many developing countries but it is a complex and pressing issue for Pakistan given its current economic situation.

Debt servicing is the repayment of borrowed funds, including interest payments and principal payments. It involves both external and domestic debts and it is a mandatory financial obligation. Pakistan has a long history of debt accumulation and it has heavily borrowed external debt without considering its repayment capacity. In addition to spending on development projects including investments in infrastructure, healthcare, education, and social services, it is also crucial for economic growth. But the burden of debt has reached such alarming levels that it is hindering investments in crucial development projects.

As of December 2023, Pakistan’s total external debt was $131.159 billion. The need for fiscal restraint and debt sustainability is made clear by the rising levels of debt. In the 2024-25 fiscal budget, approximately 40% is allocated for servicing external and domestic debt. This amount highlights how much of a financial strain debt servicing places on the nation's financial resources. $30 billion is allocated for domestic debt servicing and $20 billion for external debt servicing. As a large portion of the budget is devoted to meet debt obligations, there is a significant opportunity cost attached with it. Funds that could be used to invest in healthcare, infrastructure development, education and social welfare programs is instead used to pay debts.

Pakistan has faced fluctuating GDP growth rates, high inflation, and challenges in employment generation. These factors substantially influence fiscal policy decisions. Moreover, political dynamics also greatly influence these decisions. Budgetary allocations are influenced by stakeholder interests, government objectives, and election pledges.

Through this budget the government is trying to ensure debt sustainability but the availability of limited funds for developmental projects is posing a challenge for long-term economic growth. Development spending is very important for the economic growth as it increases the overall productivity of the country and increases investments. Infrastructure improvements such as energy and transportation networks boost economic activity by lowering transaction costs and expanding market accessibility. These expenditures increase household incomes and open up job prospects. Comparably, spending on healthcare and education enhances human capital results, which raises worker productivity and boosts economic competitiveness. Limited funds will also affect the social welfare programs such as high-quality health care facilities, e,ducational opportunities and poverty alleviation programs. It will exacerbate the socio-economic inequalities and inclusivity in the society.

Pakistan should adopt a balanced approach by integrating fiscal policies that maintain a balance between debt sustainability and economic development. The government should adopt strategies that reduce fiscal deficits and enhance revenue generation so that it does not depend on external borrowing. The tax base should be increased by reducing exemptions and improving tax compliance. It is also very crucial to improve tax administration in order to ensure transparency, reduce corruption, and make the tax system more efficient. Furthermore, a more progressive tax system should be implemented so high-income people contribute a fair share. Monetary policies should be geared towards maintaining low and stable inflation, which can help reduce the cost of borrowing. Building up and maintaining sufficient foreign reserves is essential for maintaining debt sustainability and funding development initiatives because they operate as a safety net against external shocks, maintain currency rate stability, and ease international trade and alleviate a need to borrow. Policies should be introduced that maintain a fiscal discipline as well as ensuring that sufficient amount of funds are allocated for investing in development projects. Public-private partnerships can be beneficial for achieving these goals.

The complexity of fiscal management in a developing economy is shown by the trade-offs between debt servicing and development investment in Pakistan's 2024–25 budget. Strategic foresight, stakeholder collaboration, and political will are very essential for balancing the immediate financial obligations with long-term economic goals. Pakistan can navigate these tradeoffs through a balanced approach between ensuring financial stability and investing in crucial projects that will help Pakistan to embark on a journey of sustainable growth and prosperity.

Pakeeza Bangash is a student of Government and Public Policy from National Defence University Islamabad.