At the heart of Pakistan's economic instability lies a persistent issue: the 'twin deficits'. This isn't just a single problem, but two interconnected challenges that feed off each other. The first is the fiscal deficit, which occurs when the government's spending exceeds its revenue. The second is the current account deficit, where the country spends more on foreign trade—imports, services, and transfers—than it earns from its exports and other inflows.

These two are closely linked. When a government runs a large fiscal deficit, it often injects more money into the economy. This stimulates demand, but not always for locally produced goods. A significant portion of this increased spending goes towards imported products, from consumer goods to industrial machinery. This surge in imports widens the current account deficit, creating a cycle that's difficult to break.

The government's revenue problem stems from a narrow and inequitable tax base. Pakistan's tax-to-GDP ratio is one of the lowest in the region. A large part of the economy, including significant portions of the agricultural and real estate sectors, remains outside the tax net or is undertaxed. As a result, the burden falls disproportionately on a small segment of the population and economy.

The system heavily relies on indirect taxes, such as sales tax and customs duties, which are applied to goods and services. These taxes are regressive, meaning they hit lower-income households harder. The other major source is direct taxes collected from the salaried class and corporations. This structure means that as government expenditures grow, particularly on defence and debt servicing, the revenue collected simply can't keep pace.

This gap is starkly illustrated by debt servicing costs. The interest payments on the national debt now consume over 60% of the government's revenues, leaving very little for development, education, or healthcare. This forces the government to borrow even more, just to meet its obligations.

To finance its fiscal deficit, Pakistan has historically relied on external borrowing from international institutions and friendly countries. This debt was often long-term and came with relatively low interest rates. However, in recent years, there has been a significant shift towards more expensive, short-term domestic borrowing from local banks.

This change has profound consequences. Domestic loans carry much higher interest rates, which inflates the government's debt servicing costs and worsens the fiscal deficit. It also leads to a phenomenon known as 'crowding out', where government borrowing absorbs so much of the available credit in the market that there's little left for private businesses to borrow and invest. This stifles industrial growth and innovation.

This mounting and increasingly expensive debt pushes Pakistan into a cycle of seeking bailouts. The country is often in negotiations with the International Monetary Fund (IMF). The conditions for these loans, such as those in the 2024 Extended Fund Facility (EFF), typically demand fiscal consolidation. This means raising taxes and cutting subsidies, which can be politically difficult and painful for the public, but are deemed necessary to restore fiscal discipline.

The interplay between fiscal policy and external imbalances creates Pakistan's notorious 'boom-bust' cycles. A period of 'boom' is often driven by government spending or credit expansion, leading to a temporary spike in economic growth. However, this growth is built on a fragile foundation. It's consumption-led and heavily reliant on imported raw materials and finished goods.

As the economy heats up, the demand for imports skyrockets, and the current account deficit balloons. This puts immense pressure on the country's foreign exchange reserves. When reserves dwindle to critical levels, a Balance of Payments (BoP) crisis erupts. The 'bust' phase follows.

To manage the crisis, the State Bank of Pakistan (SBP) is forced to take drastic measures. It adopts a hawkish monetary policy, sharply increasing interest rates to curb demand and control inflation. The Pakistani Rupee often undergoes a significant devaluation to make imports more expensive and exports cheaper. While necessary to stabilise the external account, these actions slam the brakes on the economy. The cost of doing business rises, industrial growth grinds to a halt, and the country enters a period of slow growth or recession, awaiting the start of the next cycle.

This recurring pattern prevents sustainable, long-term development. Each bust wipes out the gains of the preceding boom, leaving the country caught in a low-growth trap, heavily dependent on external financing to manage its chronic deficits.