For decades, Pakistan’s economic difficulties have been largely attributed to fiscal indiscipline. Government overspending, unchecked deficits, and debt accumulation have become the go-to explanations for persistent macroeconomic instability. The international financial community, domestic economists, and media narratives have frequently pointed fingers at fiscal authorities. However, recent data and economic developments tell a different story – one that demands a rethinking of where Pakistan’s real economic indiscipline lies. Contrary to popular belief, fiscal accounts are showing discipline, while the monetary side has emerged as the main source of instability and inefficiency.
During the first nine months of the ongoing fiscal year 2023-24, Pakistan recorded a primary surplus of Rs 3.5 trillion. The primary balance, which excludes interest payments, is a key indicator of fiscal health. This surplus amounts to roughly 25% of the total budget and about half of the primary component. This level of fiscal consolidation is remarkable and reflects the government’s conscious effort to restrain spending, increase revenues, and reduce the deficit. Such an achievement would, under normal circumstances, be celebrated as a sign of responsible governance and macroeconomic prudence.
Yet, paradoxically, the overall fiscal deficit continues to widen, and public debt keeps growing. The reason lies in the skyrocketing interest payments, which are now consuming a disproportionate share of public resources. These payments are not a result of new or irresponsible spending but are driven by the high interest rate policy of the State Bank of Pakistan (SBP). For most of the past three years, the SBP has maintained an exceptionally high policy rate – peaking at 22% – under the pretext of controlling inflation. Even with recent rate cuts, the bulk of government debt is now locked into long-term instruments issued during the high-rate period, meaning the cost of debt servicing will remain high for the foreseeable future.
Despite these drastic interest rate hikes, inflation remained unrelenting from 2021 to 2023, often exceeding 30%. The failure of this policy to achieve its stated objective raises a fundamental question: if inflation could not be controlled by such an aggressive monetary stance, what has been its utility? In reality, inflation in Pakistan is driven primarily by structural and external factors – exchange rate depreciation, global commodity prices, tax-induced price increases, and administered hikes in energy tariffs. These forms of cost-push inflation are largely immune to interest rate manipulation.
Instead of controlling inflation, the SBP’s policy has inflicted serious damage on the economy. The high interest rates have discouraged private investment, reduced credit to businesses, and stifled economic activity. On the public side, debt servicing has ballooned, crowding out developmental and social sector spending. As the government is forced to divert more funds toward interest payments, essential public investment contracts, triggering a negative multiplier effect. When government spending is curtailed – especially in infrastructure, education, and public services – it not only reduces aggregate demand but also undermines job creation and private sector confidence. This contraction ripples through the economy, deepening recessionary trends and lowering future growth potential.
The fiscal authorities, under immense pressure from international lenders and monetary policymakers, have been tightening spending to demonstrate commitment to macroeconomic stability. However, this pressure, when applied indiscriminately and without regard for broader economic conditions, can backfire. Over-tightening fiscal policy in a low-growth environment leads to economic contraction, not recovery. It is critical to understand that government spending – particularly on development – is not inherently wasteful; rather, it is a tool that can stimulate demand and support long-term productivity. Reducing it in the name of fiscal discipline, without parallel monetary adjustments, ends up harming both state capacity and economic momentum.
The heart of the problem lies in what can now be termed monetary indiscipline – a condition where monetary policy operates without coherence, accountability, or regard for the country’s broader development needs. In recent years, the SBP has adopted an overly rigid inflation-targeting approach, with little success in achieving its targets. Worse, the central bank has largely escaped scrutiny for these failures. While SBP’s autonomy is essential for shielding monetary policy from political interference, autonomy should not be confused with unaccountability. In any well-functioning democracy, institutional independence is balanced by institutional oversight.
Unfortunately, this balance is missing in Pakistan. The SBP is currently answerable to no elected body for the outcomes of its policies. Its performance in meeting inflation targets, managing exchange rate volatility, and supporting economic growth is not reviewed by Parliament or any independent forum. Meanwhile, appointments to key SBP positions have increasingly come from the commercial banking sector – individuals trained in profit-driven institutions, not in macroeconomic management or development policy. This creates an inherent conflict of interest, as policies that favor high interest rates tend to benefit commercial banks by widening their margins – something clearly observable in the record profits posted by banks over the last two years.
To restore macroeconomic balance and policy coherence, Pakistan must urgently institute monetary discipline. This involves more than just adjusting interest rates. It requires a fundamental rethinking of the SBP’s operational framework. First, inflation targeting must be context-specific, based on Pakistan’s structural features rather than textbook models. Second, interest rate decisions should be guided by a balanced assessment of inflation, growth, investment, and employment – not inflation alone. Third, and most importantly, the SBP must be held accountable for its actions. It is imperative that relevant parliamentary committees be empowered to review the central bank’s performance, question its leadership, and evaluate its success in achieving legislated targets.
Such oversight will not only promote transparency but also help restore public trust in the institution. It will ensure that the SBP’s autonomy translates into better performance, not detachment. Furthermore, by encouraging a more coordinated approach between fiscal and monetary authorities, it would help avoid the policy contradictions that have become routine in recent years – such as the government pursuing austerity while the central bank maintains recessionary interest rates.
Pakistan’s economy needs room to grow. This cannot happen if all fiscal space is consumed by interest payments and if private investment is strangled by an artificially high cost of capital. It cannot happen if government spending is blindly slashed in pursuit of fiscal targets while monetary policy operates in a vacuum, unaccountable and ineffective. It certainly cannot happen if development goals are sacrificed at the altar of theoretical purity.
In conclusion, Pakistan’s economic crisis today is not the result of fiscal irresponsibility, but of monetary indiscipline. While the government has demonstrated a commendable effort in controlling its spending and generating a primary surplus, the gains are being undone by a central bank whose policies are misaligned with ground realities. To correct course, we need a disciplined, transparent, and accountable monetary policy framework – one that supports stability, encourages growth, and ultimately serves the interests of the people.
