Pakistan’s economic growth, much like an old Suzuki Mehran, sputters along at an underwhelming 2.5–3.5 percent for FY25, according to the consensus forecast by the SBP, IMF, and the Finance Ministry. This is hardly a pace to celebrate for a country where population growth is closing in on 2.44 percent. A few decimal points above population growth do not constitute economic progress—at best, they prevent outright decline. To get anywhere remotely close to prosperity, Pakistan needs sustainable growth well beyond 5 percent. Instead, SBP has decided to keep its foot firmly on the brakes, pausing its monetary easing cycle despite interest rates already high enough to make borrowing a financial death sentence.
The central bank’s reasoning? In its own words, “import-based economic activity continues to gain traction.” That’s central bank lingo for: Pakistanis are back to spending on imports. The bank fears that the stability in the exchange rate, coupled with global commodity price dips, is fueling an import spree—whether in food staples such as pulses and edible oil or industrial inputs such as plastics, iron, and cotton. Lower inflation is also allowing a mild recovery in real incomes, which might nudge up consumer spending. Add in the rise in home remittances, and the purchasing power to buy imported goods is back in play.
The problem? While consumption picks up, Pakistan’s own production is in a coma. Agriculture is floundering, manufacturing is stagnant, and high energy costs, persistently high interest rates, and an oppressive tax regime have made local production thoroughly uncompetitive against imports. The result is an economy that prefers to shop rather than produce.
SBP’s policy pause also comes in the wake of the aggressive push for bank lending to the corporate sector under the Advance-to-Deposit Ratio (ADR) regime. This liquidity, instead of flowing into capital investments, has also fueled import growth. The irony here is glaring—big corporate lobby groups such as PBC and OICCI, whose members most likely enjoyed access to discounted lending rates, are applauding the SBP’s latest decision. Meanwhile, smaller industry associations are crying foul, arguing that without rate cuts, they remain choked out of credit access.
There was another way SBP could have handled this dilemma: by cutting interest rates while depreciating the currency—a move that would have simultaneously made imports more expensive and made Pakistani exports more competitive. This approach could have helped build up foreign exchange reserves, curbed the trade deficit, and given local manufacturers some breathing room. But SBP did not go that route, and for good reason.
The central bank seems to believe that messing with the exchange rate may invite chaos. If the rupee slips well beyond the psychological barrier of Rs280, remittance flows could take a hit, as overseas workers hold back in anticipation of better rates. Parallel markets (hawala/hundi) would wake up, and the resulting instability could undo the hard-fought (and IMF-mandated) monetary stability. The fear of capital flight, alongside the Federal Reserve’s cautious stance on rate cuts, has kept SBP wary of aggressive easing. The risk of diverging too sharply from global monetary trends is real—it could send capital fleeing and reintroduce volatility into an already fragile economy.
But does this mean that SBP’s obsession with exchange rate stability could come at the cost of growth? The central bank offers only a passing mention of the real problem: “Structural reforms [are] essential to achieve sustainable economic growth.” In other words, the solution lies beyond SBP’s domain.
By maintaining the high policy rate, SBP has imposed a penalty on Islamabad in the form of a higher debt servicing burden for delaying structural reforms. But here is the dilemma: despite 24 months of record monetary tightening, it is a cost Islamabad seems happy to pay—without moving an inch on long-awaited reforms. It appears the government would rather shoulder the burden of soaring debt repayments than undertake politically costly overhauls. SBP, knowingly or unknowingly, has been underwriting this inertia, creating a paradox where monetary discipline has failed to enforce fiscal discipline. The longer this continues, the more Pakistan’s economic trajectory resembles a treadmill—running in place but going nowhere.
In a recent op-ed, the CEO of the Pakistan Business Council laid out the core issues quite clearly. Pakistan’s economy needs fundamental restructuring, not monetary band-aids. The country must slash the size of its bloated government, shut down redundant ministries, and end its addiction to high taxation on productive sectors. The tax system must be reformed to stop relying on excessive indirect taxation and to restore equity in direct taxes. Industry must be made competitive not by shielding it from global competition but by lowering import tariffs and removing artificial market distortions. State-owned enterprises need to be privatized immediately, and not in a half-hearted, behind-closed-doors manner. According to Nadeem-ul-Haque, if the government cannot find private sector buyers for PIA or Discos, it should list them on the stock exchange for divestment.
While not saying as much, SBP seems to be in consensus with the diagnosis of PBC, which is also shared by a large and growing number of policy advocates. It is also signaling that it has done all it can. The macroeconomic stability achieved so far has largely been thanks to monetary tightening and fiscal discipline imposed under the IMF program. The next phase of economic correction, however, is squarely in the hands of Islamabad.
It is now up to the fiscal authorities to either push through real reforms or continue the cycle of stopgap measures and borrowed time. If the government wants growth, it must earn it—not through artificial stimulus, but through productivity-enhancing measures that remove the fundamental inefficiencies holding back Pakistan’s economy. Anything less is just another exercise in delaying the inevitable.
SBP has played its part. Your move, Aurangzeb.
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