Economic Elites: The Modern Colonizers of Pakistan

By: Hissan Ur Rehman

In Pakistan, a select group holds the reins of the economy, leveraging their influence to serve personal interests rather than public welfare. With the country grappling with a staggering 19.5% benchmark interest rate and inflation now at 9.6%, it’s evident that these economic elites are exploiting the situation for their gain. While this stringent monetary policy aims to curb inflation, its effectiveness is increasingly dubious given the complex nature of Pakistan’s inflationary pressures.

Recent global events underscore the significance of interest rates in shaping economic outcomes. Japan, traditionally known for its near-zero interest rates, recently made a slight increase, triggering concerns among global investors. This move led to a withdrawal from U.S. equities, sparking fears of a potential recession. The reaction highlights the delicate balance between interest rates and economic stability.

Interestingly, countries like Japan and China—nations that do not adhere to Islamic beliefs—have economies that closely resemble the principles of Islamic finance, particularly with their historically low or zero interest rates. This alignment with Islamic economic principles, whether intentional or not, has contributed to their remarkable economic growth and prosperity. Their example poses a significant question: why does Pakistan, an Islamic republic, continue to adhere to high interest rates that stifle economic development?

A prevailing misconception is that high interest rates help control the value of the dollar. However, it was the stringent crackdown on currency exchangers and smuggling that proved more effective. Despite an interest rate of 22%, the dollar surpassed 300 PKR but dropped following anti-smuggling measures and tighter regulation of money changers.

Inflation in Pakistan is primarily driven by cost-push factors rather than demand-pull dynamics. Historically, inflationary pressures have transitioned from being demand-driven to being more influenced by rising production costs and supply chain disruptions. High interest rates are typically used to combat demand-pull inflation, which stems from increased consumer spending. However, with current inflation largely driven by cost-push elements, this monetary approach may not address the root causes of inflation effectively.

Several indicators highlight the cost-push nature of Pakistan’s inflation. Petrol prices have surged from PKR 116.60 per liter in January 2020 to over PKR 255 per liter by mid-2024. This significant increase has escalated production and transportation costs, affecting various sectors and driving up consumer prices. The depreciation of the Pakistani Rupee has inflated the cost of imported goods. The exchange rate has increased from around PKR 155 in January 2020 to over PKR 275 by mid-2024. This depreciation has directly impacted the prices of essential commodities.

The cost of agricultural inputs, such as DAP fertilizer, has skyrocketed from PKR 4000 per bag in 2020 to over PKR 11500 by mid-2024. These rising costs have driven up agricultural produce prices. The FAO Food Price Index rose from 105.4 points in 2020 to 120.4 points by 2024, increasing domestic costs for imported goods and contributing to inflation.

High interest rates profoundly impact Pakistan’s fiscal health, particularly concerning government borrowing and debt servicing. Over 80% of the country’s borrowing is allocated towards debt servicing, consuming approximately 57% of tax revenue. This severely limits the fiscal space for development and welfare initiatives. Pakistan’s debt per capita increased from $823 in 2011 to $1122 in 2023, while GDP per capita declined from $1295 to $1223 over the same period. The external debt has nearly doubled, and domestic debt has grown six-fold, constraining economic growth and exacerbating fiscal challenges.

High interest rates increase borrowing costs for businesses, dampening investment and employment opportunities. A reduction of just 1% in interest rates could save around PKR 440 billion annually on interest payments, reducing the tax burden on the salaried class and stimulating economic activity. Enhanced economic activity could, in turn, boost tax revenues through increased business and consumer spending.

Moreover, lower interest rates could lead to higher energy consumption, addressing the capacity payment crisis. With energy consumption at 13,000 megawatts now, as it was 10 years ago, growth in energy usage would reduce the burden on ordinary citizens.

Regional economies exhibit different monetary policies. India, for instance, has maintained a repo rate of 6.5% despite similar inflationary pressures. Other regional counterparts, such as China, Bangladesh, and Iran, have managed interest rates more effectively to balance economic growth and inflation control.

The Monetary Policy Committee (MPC) of the SBP sets interest rates, with the IMF offering recommendations. Concerns about undue influence from commercial banks on the MPC’s decisions highlight the need for scrutiny to ensure decisions prioritize national economic interests. In April 2023, the MPC increased interest rates by 4% due to 40% inflation. With current inflation in single digits, there’s a case for reducing rates by 4% to 5% rather than the cautious 1.5% adjustment on the next MPC meeting on 12th September 2024.

Adjusting Pakistan’s interest rate policy is crucial for sustainable development and equitable growth. Considering the regional context, the true nature of inflationary pressures, and the broader economic impacts, policymakers can chart a course that genuinely serves the nation’s interests.

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Hissan Ur Rehman is a graduate of Lahore University of Management Sciences (LUMS) and MBA from UK in Management Consulting. He teaches financial markets in Pakistan and can be reached at [email protected]