The finance ministry has admitted that “public debt dynamics remained a key challenge” during the last fiscal year, as the increase in total public debt was “driven mainly by higher interest payments and exchange rate movements”. Photo: file
ISLAMABAD:
Pakistan’s economic debate is often confined to technical discussions – interest rates, fiscal deficits, taxation, and debt sustainability. Beneath these technicalities, however, lies a deeper structural issue: the nature of the financial system itself. An economy driven primarily by risk-free returns and debt accumulation inevitably concentrates wealth, suppresses entrepreneurship, and slows long-term growth.
There exists, however, a remarkably sophisticated framework of economic wisdom – grounded in ethical principles rather than dogma, offering an alternative growth model. This framework discourages exploitative lending, promotes risk-sharing, encourages flexibility toward distressed borrowers, and emphasises transparency in transactions. Viewed from a purely economic perspective, these principles form the foundation of an inclusive and sustainable growth model. The central economic idea emerging from this framework is simple but profound: wealth grows through productive activity, not through guaranteed returns on debt.
Debt-driven growth vs
risk-sharing growth
Modern economies increasingly rely on debt-based finance. Governments borrow to fund deficits. Corporations borrow to expand. Households borrow to consume. Banks earn through spreads between deposit and lending rates. This system creates predictable financial returns for lenders but shifts risk onto borrowers.
Such a structure creates a fundamental imbalance. Borrowers bear business risk, while lenders secure guaranteed income. When economic activity slows, borrowers struggle, defaults increase, and growth weakens. Financial institutions, however, often remain protected through collateral, restructuring, or government support. An alternative economic philosophy emphasises risk-sharing instead of risk-shifting. Under such a system, capital providers share both profits and losses. This encourages careful investment, productive enterprise, and long-term sustainability. Economically, this approach reduces speculative bubbles, discourages excessive leverage, and strengthens real-sector growth.
Capital must serve production
A key principle emerging from this framework is that capital should be linked to productive activity. When money generates money without participation in production, wealth accumulates without corresponding value creation. Debt-based finance often leads to this outcome. Financial returns become disconnected from real economic performance. Capital flows toward low-risk financial instruments rather than productive enterprises.
Risk-sharing finance, by contrast, directs capital toward business ventures. Investors seek viable projects, while entrepreneurs gain access to capital without being burdened by fixed repayment obligations. Economic growth becomes more inclusive and sustainable.
Countries with stronger equity-based financing systems tend to experience more stable growth. Venture capital, equity participation, and profit-sharing models all reflect this principle.
Flexibility toward borrowers
Another important principle is flexibility toward borrowers facing hardship. When debtors experience genuine financial distress, extending repayment periods or restructuring obligations helps maintain economic stability. Rigid debt enforcement often leads to bankruptcies, unemployment, and contraction. Financial crises frequently deepen because borrowers cannot meet fixed obligations during downturns.
Modern economic policy increasingly recognises this reality. Debt restructuring, moratoriums, and relief measures are now standard responses during crises. These mechanisms stabilise economies and prevent systemic collapse. Compassion toward borrowers, therefore, is not merely moral; it is economically rational.
Encouraging social investment
Another important principle is voluntary wealth transfers for public welfare, including education, healthcare, and social protection. Such spending strengthens human capital and promotes long-term growth. Modern economic research supports this approach. Countries investing in human development achieve higher growth rates and more equitable income distribution. Redistribution and social investment thus become drivers of economic expansion rather than constraints.
Transparency and documentation
One of the most advanced principles in this framework concerns documentation and transparency in financial dealings. Written contracts, clear obligations, and accountability reduce disputes and enhance trust. This principle is fundamental to modern financial systems. Contract enforcement, legal certainty, and transparency are essential for investment and economic growth. Informal economies often struggle because of weak documentation. Formalisation improves credit access, reduces risk, and promotes entrepreneurship.
Wealth circulation vs wealth concentration
Another fundamental principle is the circulation of wealth. When capital accumulates in a few hands, economic inequality widens and growth slows. Broad distribution of economic opportunity strengthens demand, entrepreneurship, and innovation. Debt-based systems often concentrate wealth because lenders receive guaranteed returns. Risk-sharing systems distribute gains more widely. Modern economic debates increasingly focus on inequality and its impact on growth. Broad-based prosperity is now widely recognised as essential for sustainable development.
Implications for Pakistan
Pakistan’s economy faces several structural challenges: High public debt, low investment, weak industrial growth, limited entrepreneurship, and wealth concentration. Government borrowing from banks crowds out private investment. Banks prefer lending to the government because it is risk-free. Private sector credit declines and economic growth slows. Encouraging equity financing, venture capital, and partnership-based lending could reverse this trend. Small and medium enterprises, which generate employment, often struggle to access financing. Fixed repayment obligations discourage entrepreneurship. Risk-sharing finance would allow entrepreneurs to grow without excessive financial pressure.
Inclusive finance and sustainable growth
An inclusive financial system encourages entrepreneurship, innovation, industrial expansion, and employment generation. Risk-sharing mechanisms also reduce financial crises. Excessive leverage becomes less attractive, and capital flows toward productive sectors. This model aligns with modern growth economics. Sustainable development depends on investment in productive capacity rather than speculative finance.
The principles discussed above represent sound economic reasoning supported by modern research. Risk-sharing, transparency, flexibility toward borrowers, and wealth circulation are all recognised as drivers of sustainable growth.
The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences, member Advisory Board and visiting Senior Fellow of PIDE
