Household debt and indebtedness has earned increased attention the world over. In poor countries like Pakistan, expenditures on death and marriage ceremonies, health, education of children and repayment of previous loans remain major reasons for household borrowing from the informal credit market. Along with this, disruption of livelihoods in natural calamities and prolonged conflict has emerged as a further key driver of household borrowing. However, literature on household indebtedness in Pakistan is very scant, despite household borrowing being common in the country. This gap has motivated us to undertake an assessment of the general prevalence and magnitude of household indebtedness in Pakistan, along with the impact of prolonged conflict on household borrowing from the informal credit market, in particular.
By analysing four rounds of the HIES segment of the Pakistan Social and Living Standard Measurement and data from the PPHS (covering the 2005 to 2016 period), we find that an average of one-fifth of households in Pakistan are indebted. The ratio is 2.5 times higher (at 51.63%) in the conflict-affected Swat district. In Swat, the number of over-indebted households – those using 30% or more of their income on debt repayments – increased fivefold from 11% in 2005-06 to 56.46% in 2015-16. At the time of our study, we also found that about 40% of over-indebted households were spending more than 100% of their income on the repayment of loans. Gathering the resources to repay loans often results in removing children from school, an inability to pay for health needs, poor quality diet, extra working hours, the forced sale of household valuables at a lower price and further borrowing. We also found that women have a negligible role in decision-making on borrowing, but play a key one in raising and saving resources for debt repayments.
Our research found that the destruction of livelihood sources remained the single largest factor leading to household borrowing. This indicates that strategies focused on reducing the risks conflict poses to livelihoods must be a top priority.