ISLAMABAD – The Economic Policy & Business Development (EPBD), a non-profit think tank, noted the boom and bust cycles in the country were caused by the surge in international fuel prices and not by consumer goods imports driven by low interest rates that triggered the bust. In both 2018 and 2022, it was external fuel price shocks — not domestic policy rates — that led to higher trade and current account deficits.
Gohar Ejaz of EPBD and former caretaker federal minister for commerce and industries stated that the data is particularly interesting for those who believe that the boom and bust cycles of 2018 and 2022 were caused by low interest rates. In both cases, it was the surge in international fuel prices — not consumer goods imports driven by low interest rates — that triggered the bust. He said that Rs3 trillion is being wasted annually in government expenditure due to high interest rates. Over 50 percent of the federal budget is allocated to domestic debt servicing, based on the flawed belief that these payments help prevent boom-bust cycles. Yet, in both 2018 and 2022, it was external fuel price shocks — not domestic policy rates — that led to higher trade and current account deficits, former minister added.
Pakistan’s economic future depends on redirecting resources from guaranteed banking returns toward productive investment that generates employment, enhances competitiveness, and creates sustainable growth, said EPBD. The think tank stated that banks have abandoned commercial lending entirely, preferring risk-free government bonds over business financing. The97.3 percent IDR means virtually no capital remains for working capital, expansion, or technology investment. Manufacturing enterprises cannot finance inventory, exporters cannot compete internationally, and small businesses face complete credit exclusion.
Pakistani businesses cannot compete, expand, or create jobs while banks earn guaranteed returns from government debt. Regional economies with 5.5 percent policy rates and 25 percent debt servicing achieve 6 percent growth by supporting business development. The government justifies this constraint through fear of Current Account Deficits, claiming high interest rates prevent import surges. Import data proves this reasoning is flawed. The 2021-22 CAD surge was driven by COVID vaccines ($3.2 billion), energy crisis ($15.6 billion), and smartphones ($1.7 billion) – none of which were interest rate sensitive. High rates contributed nothing to import control while crushing domestic business activity. Pakistan allocates Rs7.197 trillion annually to debt servicing – 46 percent of federal expenditure flowing to banks as guaranteed profits. With 59 percent of government debt (Rs25,758 billion) in floating-rate instruments, reducing policy rates from 11 percent to 6 percent would generate immediate savings on the majority of debt stock. The government compounded this burden by issuing Rs2 trillion in fixed PIBs at peak rates of 22 percent during fiscal year 2023-24, locking in excessive costs for banks’ benefit. Despite this poor timing, Rs3 trillion in annual savings remain achievable through rate reduction on floating debt.
With current inflation at 4.5 percent, a 6 percent policy rate would provide adequate real returns while significantly reducing debt servicing costs. This money could transform Pakistani business through manufacturing revival, industrial expansion enabling technology investments and job creation, SME development providing access to growth capital, and export enhancement through competitive financing costs. Instead, this money guarantees banking sector returns while businesses struggle with credit starvation. Pakistan’s banks operate as government bond traders while businesses cannot access productive financing. Banks earn guaranteed returns from public funds while contributing zero value to productive economic activity.
The remittance system compounds this issue, with Rs87 billion flowing to banks for basic money transfers – resources that could finance small business development. Businesses require a level playing field rather than subsidies or special treatment. Reducing policy rates to 6 percent would restore manufacturing competitiveness with regional rivals, enable export sectors to regain international market access, accelerate technology adoption across industries, and resume employment generation through business expansion. Manufacturing capacity exists but cannot expand due to financing constraints. Export potential remains unrealized due to uncompetitive borrowing costs. Small and medium enterprises could generate substantial employment if credit becomes accessible. Technology adoption across sectors awaits affordable financing solutions. Regional competitors demonstrate that supporting businesses through affordable financing policies produces 6 percent growth while maintaining fiscal stability. Their approach prioritises productive investment over financial sector rent extraction, creating sustainable economic development that benefits entire populations rather than concentrated banking interests.
The current fiscal structure forces a choice between supporting economic growth and subsidising banking sector profits through guaranteed government payments. Pakistani businesses face systematic disadvantages compared to regional competitors who enjoy government policies designed to enhance rather than constrain productive economic activity. Economic growth requires policy alignment with business development objectives rather than banking sector profit maximisation. The current approach of maintaining 11 percent rates while allocating Rs7.197 trillion to debt servicing ensures continued economic stagnation while regional competitors strengthen their industrial bases and export capabilities, the think tank added.
