In its meeting last week, the State Bank of Pakistan left the discount rate unchanged at 11 percent, arguing that the real policy rate remains adequately positive to stabilise inflation within the medium range target of 5 to 7 percent. The SBP has sourced its decision to surveys on business confidence and inflation expectations of consumers and business class in general.

But this is against the expectation of the business circles looking for further lowering of the interest rate. It has been pointed out that the policy rate of 11 percent is the highest in the region with serious implications for our economic growth. Higher policy rate means high cost of capital as an input of the manufacturing sector which also has to contend with higher utility rates relative to regional competitors.

The decision also has something to do with the IMF which says that the authorities have agreed on the need to pursue a tight monetary policy stance so that the exchange rate may absorb any emerging pressures. It is relevant to point out here the observation of the Monetary Policy Committee that remittances have remained resilient and that the flood damage to crops will impact the trade deficit. It is clear that all these factors went into shaping the decision on monetary policy.

An important development in this connection is that the FBR tax collection rose by 14.1 percent in July and August although it failed to meet its target by 64 billion rupees — a fact that reflects the over-ambitious targets set by the IMF and agreed by the authorities. Due to the widespread damage caused to the economy in general and the agriculture sector in particular, tax collection by the FBR would be significantly lower than projected and this would sharpen fiscal distress.

Another piece of disturbing news is the disbursement of only 5.3 billion rupees on development expenditure in July-August or 0.5 percent of what was budgeted for the Public Sector Development Programme (PSDP). At the same time, there has been an increase in government total debt in 2025 by 9 trillion rupees. Data for the September disbursement under PSDP has not yet been released but it seems unlikely that the government would be able to release the 15 percent of the budgeted PSDP allocation required under the rules. No doubt, the massive devastation caused by the floods would cause a hefty rise in government expenditure. But the fact remains that the government’s borrowing from the banks increased manifold last fiscal year – much before the natural calamity hit us. This crowded out private sector credit last fiscal year, resulting in an economic slowdown and negative growth of the large-scale manufacturing sector.

One reason why the economy is in a slow mode is that the bulk of credit from banks is siphoned away by the government to fund its current expenditure, accounting for nearly 93 percent of the total budget. It uses private sector savings deposited in national savings centres for meeting its administrative expenditure. This means that the money that should be utilised for the development of the social sector is appropriated to defray the ballooning expenditure of a bloated bureaucracy.

The result is that the government debt is swelling from year to year. It is expected to surge further in the current fiscal year with the government approval of borrowing 1.225 trillion rupees from commercial banks to retire the circular energy sector debt. In the meantime, the International Monetary Fund has interjected a clause of uncapping the 10 percent debt service surcharge cap to ensure full cost recovery. This presages a further increase in the utility charges.

To add to the woes of the government is the staggering cost of post-flood rehabilitation and reconstruction involving billions of dollars. Uptil now no aid or grant is coming from any international sources and the authorities will be hard put to generate necessary funds for the purpose. The easy way out for the babus sitting in Islamabad would be to increase the tax burden for all sectors, but this will break the backbone of the economy which is already in tatters. The unemployment rate has risen sky high and over 48 percent Pakistanis are living below the poverty line.

It is time to gird up our loins and scour our indigenous resources to meet the challenge ahead. Without further delay, the government should undertake structural reforms to secure our economic future. The reform plan should start with a massive reduction in current expenditure supported by reforms in the power sector. Greater efficiency in tax collection together with elimination of corruption in FBR would generate the requisite resources without the government having to go to the IMF and other international agencies with a negging bowl.