The Sustainable Development Goals (SDGs) are a global commitment to ending poverty, promoting prosperity, and protecting the planet. As a responsible member of the international community, Pakistan has pledged to achieve these goals and has formally adopted them as its national development agenda through the National Assembly. This commitment binds Pakistan both externally, in alignment with global expectations, and internally, as a framework for policy and development planning. Achieving the SDGs is crucial for Pakistan’s economic growth, social progress, and environmental sustainability. Effective policies, strong governance, and public-private collaboration are essential for realizing these ambitious but necessary objectives.
The State Bank Act that Pakistan approved in 2022 is a clear violation of its commitment to the SDGs. The objectives of central banking in any country include employment, growth, and price stability, where the first two often trade off with the third. A central bank must balance these conflicting goals, but the SBP Act designates price stability as the primary objective, pushing employment and growth to a tertiary status. Surprisingly, employment and growth are among the SDGs, while price stability is not. Through this Act, Pakistan has committed to achieving what is not in the SDGs at the cost of what is.
Deciding priorities among economic objectives has long-lasting consequences. In 2019, Pakistan’s growth rate fell from 6.1% to 3.4%. Had economic growth been the central bank’s primary objective, it would have lowered interest rates to stimulate business activity. Instead, prioritizing price stability, the central bank raised interest rates, further slowing growth. This led to Pakistan’s first-ever negative growth in 2020. The same approach was repeated in 2022, resulting in another negative growth rate in 2023. This pattern highlights the risks of rigid monetary policies and the need for a balanced approach that considers both growth and price stability.
When the State Bank focuses on price stability, it raises interest rates to curb inflation. This policy can operate through two channels. The first is the demand channel, which suggests that higher interest rates reduce consumer spending, leading to lower aggregate demand. As a result, equilibrium prices may fall, but at the cost of reduced GDP and employment. The second is the cost channel, which argues that higher interest rates increase production costs, causing supply shortages. This supply constraint can drive prices higher instead of lowering them while also reducing employment and economic growth. Thus, achieving price stability comes with significant economic trade-offs.
Raising interest rates may affect the economy through two possible channels. The demand channelwhich suggests that higher interest rates reduce consumer spending, leading to lower prices but also lower employment and economic growth. On the other hand, the cost channelsuggests that higher interest rates increase production costs, causing supply shortages that push prices higher while still reducing employment and growth. Regardless of which channel dominates, the outcome is clear – economic growth and employment decline. However, the impact on prices remains uncertain. Thus, when the central bank raises interest rates, it imposes a definite cost on SDGs for a questionable benefit.
The definite costs of reduced employment and economic growth, resulting from higher interest rates, have far-reaching consequences, especially for the poorest segments of society. When the unemployment rate rises by 1%, it often leads to a disproportionately larger increase in unemployment among the poorest groups, such as daily wage workers and temporary job holders, who are already among the most vulnerable. In the absence of social security systems, these individuals are more likely to face financial hardship, as they lack the safety nets to cushion the impact of job loss.
For the poorest, even a modest increase in unemployment can translate into significant rises in poverty and hunger. Without stable income sources, many will struggle to afford basic necessities, leading to malnutrition and a decline in living standards. This directly undermines SDG 1 (No Poverty) and SDG 2 (Zero Hunger), as these individuals, already on the brink of survival, are pushed further into hardship. The absence of social protection exacerbates the negative impacts, making it more difficult for them to recover. Therefore, the policy decision to increase interest rates, while aimed at controlling inflation, could unintentionally worsen poverty and hunger for those least equipped to bear the burden, hindering progress toward achieving these crucial SDGs.
In Pakistan, the negative impacts of rising interest rates are often amplified due to the country’s significant debt stock. As interest rates increase, a larger portion of the government’s revenue is directed toward servicing its growing debt, particularly the rising markup payments. This diversion of funds reduces the availability of resources for other critical government functions, including investments in social services, infrastructure, and sustainable development programs. For instance, in the current fiscal year, Pakistan allocated a staggering 9,775 billion PKR for markup payments, which constitutes 57% of the federal government’s total current expenditures.
Such a large allocation towards debt servicing means there are fewer funds available for essential programs aimed at achieving the SDGs. The lack of resources hampers efforts to address key areas like poverty alleviation, quality education, healthcare, clean water, and economic growth – goals that are critical to the country’s development. As a result, the rise in interest rates negatively impacts not only the government’s fiscal stability but also its capacity to make meaningful progress toward achieving the SDGs. The government’s focus shifts from long-term development to short-term debt obligations, stalling progress on poverty reduction, economic empowerment, and social well-being. Hence, increasing interest rates hurt the achievement of all SDG goals and targets in Pakistan.
The second most harmful provision in the State Bank of Pakistan (SBP) Act is the prohibition of direct borrowing by the government from the central bank. This provision goes against the established practices of central banking globally. In response to the COVID-19 pandemic, most advanced and a majority of developing countries borrowed extensively from their central banks to mitigate the economic crisis.
In contrast, while countries were prioritizing financial interventions to stabilize their economies, Pakistan was formulating legislation to restrict such borrowing. This clause in the SBP Act significantly limits the government’s ability to respond swiftly in times of economic distress, such as during the pandemic, where immediate liquidity was crucial. This restriction is a direct barrier to achieving the Sustainable Development Goals (SDGs) in Pakistan.
The government requires access to flexible funding mechanisms, including borrowing from the central bank, to allocate sufficient resources toward SDG-related initiatives such as poverty reduction, education, health, and infrastructure development. Without the ability to manage short-term fiscal imbalances through this channel, the government’s capacity to invest in long-term growth and development is severely compromised.
Therefore, the SBP Act needs urgent revision. The priorities outlined in the Act should be realigned to emphasize economic growth and employment, rather than focusing solely on price stability. The SDGs should not be compromised in the pursuit of monetary stability. A more balanced approach, recognizing the trade-offs between these objectives, is essential for ensuring that the country’s development goals are met without hindering the broader social and economic progress.
