Inflation and the cost of an unreformed state

Pakistan’s inflation problem has returned just as the government wants the public to believe that macroeconomic stability has been restored. CPI inflation was 11.1 percent year-on-year in June 2026, slightly below May’s 11.7 percent, but far above the 3.2 percent recorded in June 2025. Inflation has moved from 5.8 percent in January to 7.0 percent in February, 7.3 percent in March, 10.9 percent in April, 11.7 percent in May and 11.1 percent in June. The issue is no longer whether prices are rising again. The issue is why Pakistan keeps allowing the same pressures to return.

The usual response is to ask what State Bank of Pakistan (SBP) should do next. That question matters, but it is too narrow. Monetary policy can restrain demand, influence expectations and support the currency. But it cannot produce cheap electricity, reduce circular debt, rationalise gas pricing, reform wheat procurement, cut VIP protocol, close duplicate structures, prevent inflated public works or reduce the cost of government itself. Much of Pakistan’s inflation is created where the state actually operates: in budgets, tariffs, energy pricing, taxation, subsidies, public-sector losses and administrative excess.

Pakistan does not only have an inflation problem. It has a government-cost problem. The state is too expensive for the economy it governs. It taxes formal activity, borrows heavily, protects loss-making structures, subsidises failure and then passes the pressure to citizens through prices, tariffs and indirect taxation. Debt servicing reflects past deficits and fiscal indiscipline, but the deeper issue is what Pakistan continues to spend on itself while claiming there is little space for the citizen.

The public is told there is no fiscal space, yet there is always fiscal space for official residences, fleets of vehicles, fuel entitlements, staff, maintenance, allowances, protocol and overlapping departments. Households are asked to absorb inflation. Industry is asked to survive higher input costs. The state rarely applies the same discipline to its own privileges.

Official housing is a clear example. Senior officers continue to occupy government residences in prime urban locations, including GORs, where large houses are maintained through public systems and allotted through official privilege rather than market discipline. These assets are not costless. Prime urban land locked into official housing could support commerce, housing, mixed-use development, walkable density, investment and local tax revenue. Instead, it is held down by colonial privilege. The loss is not only fiscal. It is a loss of growth, investment, productivity and urban dynamism.

Transport privileges follow the same pattern. Senior officers receive official vehicles, personal-use vehicles and fuel allocations. VIP protocol turns privilege into a daily public spectacle. Convoys consume police manpower, fuel, vehicles, drivers, road space, and citizen time. They disrupt traffic and normalise the idea that public authority is entitled to public inconvenience. A government that asks citizens to bear high energy prices cannot maintain a transport culture insulated from those prices.

This culture survives because the bureaucracy has become self-protecting and self-replicating. Pakistan has an administrative machine that preserves files, posts, privileges and procedures more effectively than it delivers services. Citizens encounter the state through delays, weak schools, under-equipped hospitals, poor policing, slow courts, municipal failure and arbitrary enforcement. Yet the administrative structure continues to expand, duplicate itself and demand more resources.

Duplication between federal and provincial governments is one of the clearest examples. After the 18th Amendment, major subjects such as education, health, agriculture, food, population welfare and social services were substantially devolved to provinces. In principle, this should have reduced the federal footprint. In practice, many federal structures remained while provinces maintained their own departments, secretariats, schemes and chains of command. One taxpayer finances overlapping mandates, repeated meetings, competing databases, rival turf claims, and blurred responsibility.

Pakistan also responds to institutional failure by creating new structures on top of old ones. When an institution fails, the state rarely reforms it, professionalises it, digitises it or shuts it down. It creates another body above it: another council, committee, secretariat or special mechanism. Committee culture then becomes a substitute for decisions. Files move, meetings are held, minutes are recorded and subcommittees are formed, while the citizen remains stuck with the same delays, costs and uncertainty.

Public works add another layer. Roads, buildings, bridges, water schemes, housing projects and development packages are too often loaded with inflated estimates, weak design, padded quantities, cartelised bidding, unnecessary specifications, political rerouting, variation orders, time extensions, and revised PC-1s. Corruption does not merely steal money after the fact; it raises the cost before the first brick is laid. A project that should cost ten begins at fifteen, is revised to twenty and still arrives late, incomplete or defective.

The same pattern appears in subsidies and public-sector losses. Power-sector subsidies, circular debt financing, tariff differentials, support for loss-making entities and vague grants often conceal the cost of unreformed systems. When DISCOs fail to recover bills or control losses, citizens pay through tariffs. When public entities lose money, citizens pay through taxes. When energy pricing is delayed for political reasons, citizens pay later through larger adjustments. The bill is transferred downward.

This is why inflation in Pakistan is not merely too much money chasing too few goods. It is also too much government chasing too little accountability. The private citizen is expected to become efficient. The public sector is allowed to remain ceremonial, duplicative and costly. An anti-inflation policy that ignores this cost structure will always be incomplete.

SBP then becomes the visible firefighter for a fire lit elsewhere. It raises interest rates to reduce inflation, but it must also stay with a tight monetary policy to support the rate. Once the policy rate is announced, SBP cannot keep supplying cheap liquidity to ensure the rate remains only a soft signal. The rate must become a floor for government borrowing. If government borrows heavily from the banking system and SBP provides liquidity to hold rates low, the result is inflationary. If government bypasses the banking system and simply prints money, the result is also inflationary. The mechanics differ, but the pressure is the same: the state is financing itself by taxing the public through inflation.

A serious anti-inflation policy must therefore begin where inflation is being produced. Government operating costs need to be cut. Perks should be monetised, capped or rationalised. Official housing should be audited and gradually released for productive urban use. Vehicle fleets and fuel entitlements should be reduced. Protocol should be restricted to genuine security needs. Overlapping federal and provincial functions should be merged or closed. Redundant committees should have sunset clauses. Approvals should be digitised. Procurement contracts, project costs and revised PC-1s should be published. Repeated cost escalation should carry consequences. Loss-making SOEs and DISCO governance require restructuring rather than recurring fiscal cover.

Cutting government expenditure does not mean cutting teachers, nurses, courts, policing or basic public services. It means cutting the silly perks and colonial privileges that consume resources, block land, distort cities and reduce investment. Pakistan needs effective government: accountable schools, reliable energy companies, functioning courts, professional regulators, honest procurement and fair taxation. What it does not need is a government that protects villas, convoys, vehicles, fuel, duplicated departments, inflated contracts and committees that supervise committees while asking the public to sacrifice.

The policy rate cannot fix this. Higher interest rates may restrain demand, but they cannot make a bloated state lean, reduce official privilege, merge duplicate ministries, make procurement honest or turn committees into decisions. That work belongs to elected governments, cabinets, finance divisions, chief secretaries and legislatures. Inflation will not be sustainably controlled until the state stops passing the cost of its own dysfunction to citizens. Pakistan does not need another lecture on austerity. It needs austerity inside government itself.

Copyright Business Recorder, 2026