Pakistan's Quarter-Century Ponzi Scheme and Its Unsustainable Exit

For a quarter of a century, Pakistan has relied on what economist Hyman Minsky termed "Ponzi finance," a system where interest payments on national debt are funded by borrowing more money. This practice has persisted from the late 2000s until two years ago, with the nation's budgets consistently running deficits even before accounting for interest payments.

The consequence of this sustained borrowing is a dramatic increase in Pakistan's debt burden. The country's debt-to-GDP ratio climbed annually from 2012 to 2023. Starting at 58% of GDP, it surged to over 82% by 2023, with a minor exception in 2021 due to COVID-19 relief measures.

The article argues that this approach is unsustainable, characterizing it not merely as high or rising debt, but as a specific condition where interest is paid by acquiring new loans. This financial strategy, according to the analysis, lacks a sound economic foundation and resembles a Ponzi scheme, where early investors are paid with funds from later investors.

The piece suggests that Pakistan's economic management has prioritized short-term liquidity over long-term fiscal health, creating a cycle of dependency on external borrowing. The lack of a clear exit strategy from this financial predicament is presented as a critical challenge for the nation's economic stability.