Pakistan’s economic woes are often pinned on external debt and the International Monetary Fund (IMF), but a closer look reveals an inconvenient truth: our real economic haemorrhage is happening domestically.
Pakistan’s economic woes are often pinned on external debt and the International Monetary Fund (IMF), but a closer look reveals an inconvenient truth: our real economic haemorrhage is happening domestically.
The government of Pakistan owes Rs35 trillion to local commercial banks, far surpassing the Rs25.2 trillion ($90 billion) it owes to external creditors like the IMF and World Bank. However, the terms of these debts tell an even more shocking story.
The external loans -- often portrayed as Pakistan’s biggest financial burden -- come at an average interest rate of just 1.0 per cent. But the real burden lies in domestic borrowing, where interest rates have historically hovered around 22 per cent and, even today, stand at 12-13 per cent. This creates a grotesque imbalance: while Pakistan’s external creditors charge a nominal rate, local banks enjoy enormous returns at the expense of the taxpayer.
Who benefits from high interest rates?
The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) has kept real interest rates excessively high, among the highest in the region. The biggest winners of this policy? Local commercial banks. The banks, holding massive amounts of government debt, continue to rake in record profits simply by parking their money in risk-free government securities, lending it back to the government at exorbitant rates.
This setup creates a financial elite that thrives off the state’s need to borrow, ensuring that Pakistan remains locked in a cycle where debt servicing consumes an ever-growing share of the budget. The losers? The government -- which has to pay around Rs8-9 trillion in interest payments -- and, more importantly, the people of Pakistan, who suffer from reduced public spending on healthcare, education, and infrastructure.
The false narrative of high interest rates
Defenders of high interest rates argue that they are necessary to control inflation and manage the current account deficit by curbing imports. However, this is a deeply flawed argument, or rather, a convenient excuse for those profiting from high rates.
Take India as an example. India does not solely rely on high interest rates to curb imports. Instead, it imposes non-tariff barriers such as quality standards, licensing requirements, and regulatory approvals to control the influx of non-essential goods. Even the US faces such barriers when trading with India. This means that Pakistan, too, has other tools at its disposal beyond simply crushing domestic demand through sky-high interest rates.
Pakistan’s economic survival does not depend on IMF loans or foreign bailouts.It depends on freeing itself from the domestic financial elite that profits from state debt
The role of banking lobbies and the ‘Economist-Media Complex’
So why does Pakistan persist with such a punishing monetary policy? The answer lies in the powerful banking lobby, supported by so-called economists and their proxies in the media, who continuously justify high rates with misleading economic narratives. These voices -- knowingly or unknowingly -- serve the interests of the financial elites rather than the broader economy.
The reality is simple: keeping real interest rates unnecessarily high is not economic prudence; it is economic warfare against the state and its people.
Reforming the monetary policy
Pakistan does not need to impoverish its businesses, households, and government to maintain macroeconomic stability. Instead, a more balanced approach is required:
1. Lowering interest rates to a sustainable level so that the government is not forced to spend most of its revenue on interest payments.
2. Implementing non-tariff barriers to manage imports rather than punishing the economy with high borrowing costs.
3. Breaking the stranglehold of banking lobbies by ensuring greater transparency and independent policymaking within the SBP.
4. Promoting alternative financial models, such as Islamic finance, to reduce dependence on debt-driven growth.
Time to break free
Pakistan’s economic survival does not depend on IMF loans or foreign bailouts. It depends on freeing itself from the domestic financial elite that profits from state debt. The Monetary Policy Committee, rather than serving commercial banks, must prioritise the real economy -- reducing interest rates to sustainable levels and redirecting government resources toward development, not debt servicing.
Until then, Pakistan will remain a country where banks thrive, the government struggles, and the people suffer.
The writer is a consultant and teaches financial markets in Pakistan.He can be reached at: hissan3@gmail.com
