Debt Dynamics and Economic Growth in Pakistan Vol. 31 Issue 01, 2026

Abstract

This paper estimates the impact of unanticipated public debt shocks on economic growth in Pakistan using a forecast-error identification strategy. Exploiting deviations of realized debt outcomes from contemporaneous IMF forecasts for the period 1994–2025, the analysis finds that a 1 percentage point increase in the public debt reduces real GDP by about 0.21 percent in the subsequent year. Extending the analysis to allow for nonlinearities, a debt threshold of 57 percent of GDP is identified, beyond which debt exerts a drag on growth. The findings highlight the macroeconomic costs of fiscal surprises and persistently high debt-to-GDP ratios, underscoring the need for a credible medium-term fiscal reform strategy.