Default is a choice — and Pakistan keeps choosing to choke instead

The arithmetic of 26 billion dollars

The episode opens with Muzamil introducing his guest as a senior lecturer in economics at the University of Bristol, previously at Queen Mary University of London, with a PhD in monetary economics from Bristol and prior work at Pakistan’s Planning Commission. The first question is the one most viewers actually want answered: what does Pakistan’s debt situation really look like, stripped of political theatre?

Ahmad Jamal Pirzada starts with a single number. Pakistan owes roughly twenty-six billion dollars in external debt servicing over the next twelve months. That figure, he says, is “around thirty-five to forty percent” of Pakistan’s dollar income — primarily exports and remittances. “This is actually one of the highest in the world,” he tells Muzamil. The only countries with a higher ratio are a handful of very small African and island economies most people cannot even name. Among major economies, Pakistan stands out.

Pirzada is careful to clarify, when Muzamil interrupts to ask whether this is a share of GDP, that it is not. It is forty percent of the actual dollar income the country generates. The distinction matters because debt-to-GDP looks tolerable in Pakistan’s case. Debt-servicing-to-dollar-income does not.

This situation, he stresses, is not new. The number has been “floating around twenty, twenty-five billion” for two years. The buildup goes back to 2016 and 2017, when borrowing began compounding into the structure that finally peaked into today’s bill. The way Pakistan has been managing it is by slowing the domestic economy hard enough to generate a current-account surplus — currently around five billion dollars a year — almost all of which goes directly to interest payments on external debt.

Rolling over is not relief

Muzamil presses on a specific confusion that he says he carries into the conversation. When the finance minister talks about rolling over debt with friendly countries, does that mean the principal is genuinely deferred? Or does it mean the interest keeps compounding while the headline payment is pushed back?

Pirzada’s answer is layered. The COVID-era debt suspension, he says, did produce real relief — and the reserve buffer Pakistan built in 2021 was a direct consequence. What went wrong was the fiscal stimulus that followed in 2022, combined with the global monetary tightening that pulled capital out of every emerging economy at once. He also corrects a common framing: most of the twenty-six billion is not new debt. It is past debt now maturing — debt taken between 2018 and 2022, debt from CPEC, and a portion of the debt that was restructured all the way back in 2001.

He links this to a critical structural feature: Pakistan’s debt is not market debt. “It’s not that the investor or the market is lending to you depending on their projections about your future,” he explains. “A lot of this debt is very much tied to geopolitics.” World Bank, IMF, China, GCC deposits at the State Bank, swap lines with China that have already been maxed out — these are not bond investors making rate calls. They are sovereign relationships. The implication is uncomfortable. The 2001 restructuring worked because 9/11 created a single geopolitical moment that brought every creditor to the same table. There is no equivalent moment available today, because the creditor list is now too fragmented. China, GCC and the Paris Club do not share an aligned interest the way the Paris Club alone once did.

Default is a choice — and so is restructuring

Later in the discussion, the conversation reaches what Pirzada treats as the central economic question hiding behind the political theatre. “Default is a choice,” he says, more than once. A country can always choose not to default. It can cut its food spending, its education spending, its health spending — squeeze its citizens hard enough to keep servicing the debt. The question an economist asks is not whether default is bad. It is whether default is less bad than the alternative.

He cites Kenneth Rogoff approvingly here. There are conditions, Rogoff has argued in print, where a country is genuinely better off defaulting than adopting traditional adjustment policies. The reason governments avoid the conversation is political, not economic. “People kind of get offended by the term default,” Pirzada says. “But it’s a very economic question. Which of the two options is better?”

Restructuring, he points out, is the same thing wearing a more acceptable label. He breaks it into two forms. A haircut reduces nominal principal — one hundred billion becomes ninety. An NPV reduction keeps the nominal value but stretches the maturity, lowering the present value of the obligation. Pakistan’s debt-to-GDP ratio is high but not extreme. The debt-servicing-to-dollar-income ratio is what’s lethal. So a maturity extension that brings the annual bill from twenty-six billion down toward twelve or fifteen billion would, by itself, restore enough room for the finance minister to “come out of the mindset of checking which flight to catch to which country whose loan matures next month.”

Muzamil flags an additional complication that Pirzada confirms. Pakistan does not fall into the IMF/World Bank low-income classification — it sits in the upper category, which means any formal restructuring conversation will also pull domestic debt onto the table. And domestic debt restructuring is something the banking sector simply cannot absorb without triggering a second crisis. That, Pirzada notes, is exactly the kind of negotiation creditors and the IMF are most reluctant to open.

Why “inflating it away” is not actually a strategy

Muzamil floats one of the more popular fixes that circulates in commentary — that Pakistan could just inflate the local-currency debt away, the way Turkey effectively has. Pirzada rejects the premise cleanly. “If everyone knows this is what the government is going to do, then it won’t work,” he says. Bankers price forward. The moment they expect inflation to jump from ten percent to thirty, they price every new bond issuance at thirty. The surprise window closes the day the strategy becomes legible. The only way inflate-away works is by surprise — and you cannot build a multi-year policy around a one-time surprise.

There is a third option that doesn’t get named in headlines: the long, slow choke. Pirzada calls it “chipping away.” Privatise, cut the size of government, run a fiscal surplus, keep monetary policy tight, push the gap between exports plus remittances and imports wider and wider until you can start paying down principal rather than just interest. Greece did this. It worked, in a narrow technical sense. The economic and human cost was severe enough that economists openly debate whether default would have been kinder.

The IMF’s projections don’t add up

Pirzada is openly critical of the IMF’s forecasting. The Fund’s standard staff-level documents, he says, project Pakistan’s economy growing at five percent indefinitely — five percent through 2032. “Every child knows,” he says, that Pakistan’s trend growth is between three and four percent. The economy can spike above that briefly during a CPEC-style inflow or a post-COVID rebound, but it always reverts.

What troubles him about the IMF’s math is the input that produces the optimistic trajectory: a systematic over-projection of private creditor inflows. “Private creditors have never given you more than four or five billion in any year of your history,” he tells Muzamil. “And the IMF projects that number will jump to eight billion, then twelve billion. Like — come on.” This matters because once you assume those inflows, every other number works out. The debt-to-GDP ratio falls, the path looks sustainable, the colour on the dashboard turns from red to green. Strip the assumption out and the whole picture turns red again.

The point lands politically too. The IMF’s reluctance to be straight about the cost of a traditional adjustment program is, in Pirzada’s reading, what blocks honest national conversation about whether restructuring is the lower-cost path.

Three economies, three trajectories, one set of reforms

About halfway through, Muzamil pivots the conversation toward the structural question: how do you actually grow out of this? Pirzada anchors his answer in a comparison drawn from a book he is currently reading by Ishrat Husain — the development paths of Pakistan, India, Bangladesh and China from 1990 onward.

The 1990s reforms across all four countries, he points out, looked remarkably similar. Privatisation. Opening up to foreign investment. Lower trade tariffs. The starting policy mix in 1967 was also not wildly different — import substitution, subsidies, protection. So if the reforms were similar, why are the trajectories now so different?

He gives the numbers. From 1990 to 2018, Pakistan’s labour productivity grew by about 1.3 percent a year. Bangladesh grew at roughly 3.8 percent. India between four and five percent. China at seven to eight percent. He uses the example Muzamil offers — a worker in a jeans factory who can either stitch ten pairs a day or one hundred. That gap is productivity. It depends on the manager’s skill and on the quality of the machines the firm is willing to install.

Capital inflows do not explain the divergence. China received four to six percent of GDP in foreign inflows a year. India around four. Pakistan was at two — lower, but not catastrophically so. Bangladesh actually received less than Pakistan on average. So inflows are not the variable.

The variable, Pirzada argues, is what the country did with the dollars when they arrived. “China saved them as dollar reserves,” he says. “They actually ended up saving more than what came in, taking it out of their own pocket and putting it into reserves.” Pakistan, by contrast, “saves for two years, spends for two years, saves for two years, spends for two years.” The reserve buffer never accumulates. And without that buffer, no foreign investor can model their downside risk, so even attractive returns get discounted by the risk premium until they stop looking attractive at all.

Why the policymakers behave this way

Muzamil asks the question that needs to be asked: Pakistani policymakers are not stupid. They are not from Mars. They speak the language, they understand the arithmetic. Why do they keep choosing the short-sighted path?

Pirzada’s answer is that the short-sightedness is structural, not personal. Because reserves were never built, the economy is structurally vulnerable to even small shocks. A modest fiscal expansion under the wrong global conditions produces a crisis within six months. “In which economy does six months of loose fiscal policy produce a crisis?” he asks. The answer is: only an economy that never built insurance. And once you’re permanently vulnerable, every government inherits a horizon that ends in months, not years. The political economy of always-imminent crisis is what produces always-short-sighted policy.

The boom-and-bust pattern reinforces the productivity gap. Without long-horizon stability, no one installs the better machine. The jeans worker stays at one hundred pairs a day while his counterparts elsewhere reach two thousand. Returns in Pakistan can be high. But “you don’t just look at the return,” Pirzada says. “You also look at the risk. The risk is so damn high that even the very attractive returns are not attractive.”

Two theories of change — Acemoglu’s masses or Drèze’s wise elite

Toward the end, Pirzada lays out two competing frameworks for how Pakistan actually gets out. The first, drawn from Jean Drèze, is top-down: the elite recognises the failure of the current path, sits together, and chooses a different one. The second, drawn from Acemoglu and Robinson, is bottom-up: the masses protest, vote, and exert democratic pressure that forces the elite to change course.

Pirzada admits he leans toward the second. He uses a domestic example. The PTI government’s health-insurance policy was popular and effective — but voters did not stay loyal to it. They voted differently in subsequent local elections because they wanted to know what came next. “You’re not going to be a slave of a good policy you’ve implemented,” he says. “Show us a better future than what is already there.” The Pakistani voter, in his reading, is forward-looking, intelligent, and punishes politicians who stop delivering improvement — a more sophisticated electorate than the urban intellectual class typically credits.

His second concern is that the top-down model assumes elite decisions hold for decades. In the 21st century, he argues, the underlying technology and economic structure shift too fast for that. Even if the elite reached a wise consensus today, the world ten years out — AI, robotics, climate-shifted agriculture — would render the consensus obsolete. A flexible democratic system is messier but adapts faster.

He raises one more variable explicitly: the military. The military is not just a political actor in Pakistan. It is a major economic actor — real estate, food, fertiliser, multiple protected sectors. Any honest theory of change has to account for an institution whose business interests are structurally entangled with the policies that need to change.

Three scenarios — and only one is honest

By the end of the conversation Muzamil presses Pirzada on the inevitability of change. Things, he argues, cannot continue as they are. The population is too large, too educated, too aware. Business-as-usual has a shelf life.

Pirzada lays out three scenarios cleanly. The first is the status quo carrying forward: elites do not share power, the economy does not improve, no external rescue arrives, and Pakistan moves toward what he describes as anarchy or systemic persecution — the kind of environment where speaking up costs you, or your family, and where anyone with options simply leaves.

The second is the recurring Pakistani historical pattern: get lucky. A 9/11-style geopolitical accident shows up, a major creditor extends maturities by fifteen years, the global economy booms, and Pakistan buys another decade. He notes that the entire current policy posture — waiting for eighty billion from the GCC that became twenty, then five, then two, then the one hundred and one million from the US that has now become the news — is built around this hope. “The point is that you have been looking for someone else to come from the outside to bend you out so you can keep the whole thing going for another five, ten years.”

The third is the one he believes in. Elites step back. Power is genuinely shared — politically, ethnically, religiously, across regions including Balochistan, KPK, AJK, GB. Contracting institutions are made credible enough that a freelancer can trust they will be paid, and a manufacturer can trust a supply contract will hold. Only then, he argues, does the high-value-added production base that drives sustained productivity growth become possible. Without contractual credibility, no complex production chain forms, because every link in the chain is a risk.

The episode runs nearly an hour and fifty minutes — Muzamil notes they had originally agreed on forty-five. He closes by asking viewers what they think: should Pakistan default? Will the elite let go? Or does the system keep rolling, scenario by scenario, until one of them finally gives way?