It has been evident for some time that Pakistan’s debt burden is extremely onerous. The danger of external debt default first emerged in 1996 towards the end of the second Benazir government. Following the nuclear explosions by first India and then Pakistan and the subsequent imposition of economic sanctions by the Western countries in mid-1998, Pakistan froze the foreign currency deposits, a major source of balance of payments financing in recent years, and went into a technical default on external debt. Following a fresh agreement with the IMF in January 1999, Paris and London Clubs provided substantial debt relief in the form of rescheduling of debt payments due in 1998-99, 1999-2000 and the first half of 2000-1. Despite debt relief, the burden of external debt remains extremely heavy and the danger of default has not disappeared. In any case, the access to international financial markets has been greatly curtailed, if not eliminated, especially because The Paris Club has applied the ‘comparability of treatment’ to claims of private sector investors. On the domestic side, the heavy burden of servicing public debt has made the much needed fiscal adjustment both difficult and disorderly. The rise in interest payments from 2.2 percent of GDP in 1979-80 to 4.9 percent in 1988-89 and to the peak of 7.3 percent in 1998-99 made reductions in fiscal deficit hard to achieve. As interest payments now account for over 45 percent of government revenues, the fiscal deficit reduction has come mainly at the cost of development spending. Clearly the debt overhang is a major factor in the decline in the investment rate to 15 percent of GDP in 1998-99 and 1999-2000, the lowest level in more than two decades. Unless the debt burden can be brought down to more manageable levels, macro-economic management will remain problematical and growth prospects will remain clouded.