EDITORIAL: A webinar titled ‘Managing Stability During Uncertain Times: Role of Monetary Policy in Pakistan’ elicited justified criticism by the Additional Director Monetary Policy Department of the State Bank of Pakistan Dr. Fayyaz Hussain; notably, that excessive government borrowing from the banking sector, indirect taxes and the informal economy dilute the effectivity of a tight monetary policy. With respect to heavy government borrowing, Dr Hussain pointed out that it crowds out private sector borrowing with banks preferring risk-free government securities over risky private sector ventures.
There can be no argument against his assertion; however, what is noteworthy is that government borrowing’s negative fallout is exacerbated by the reported recent successful attempt to brow-beat the commercial banking sector (14 banks) to extend 1.25 trillion-rupee loan to the power sector, which it was resisting due to its over exposure to the sector.
Dr Hussain added that administrative measures raising utility tariffs, as part of the International Monetary Fund’s (IMF’s) prior conditions, and high fuel prices (with reliance on petroleum levy rising over time not only because it is regarded as a low hanging fruit but also as a means to generate revenue that is not part of the divisible pool) – policy decisions that are not driven by demand.
Again, this statement is not challengeable; however, these administrative measures are taken at the behest of donors as the power sector is unable to ensure full-cost recovery, leading to a widening gap between cost and revenue that in turn fuels the circular debt.
The government, instead of abandoning its policy of an over-generous tariff differential subsidy, on average budgeted at 750 billion rupees, including a 163 billion-rupee subsidy for K-Electric in 2026-27, relies on higher borrowing with interest passed onto the consumers.
A better option would be for the government to allow distribution companies to charge rates that reflect their costs, which would compel them to improve their performance in reducing losses (transmission and distribution).
Indirect taxes, as correctly pointed out by Dr Hussain, fuel inflation that monetary policy tightening is unable to tackle. He further admitted that while rising energy and food costs cannot be controlled by a tight monetary policy yet he argued that it can ensure that such price shocks do not seep into core inflation, which “would be very difficult to bring it down towards the target range.” In other words, a persistently high consumer price index would eventually raise everyday expenses of businesses - higher transport costs, utilities and operating costs in general – that in turn would seep into core inflation.
Indirect taxes are the major source of government revenue and are budgeted at 7.6 trillion rupees for next year though 70 percent of all direct taxes are collected in the sales tax mode (an indirect tax), implying an additional 5.3 trillion rupees. Petroleum levy budgeted at 1.675 trillion rupees credited to other taxes is yet another indirect tax, which gives total reliance on indirect taxes next year at 14.975 trillion rupees.
And the large informal sector, 20 to 30 percent, is another drain from the system and dilutes the impact of the monetary policy.
Finally, Dr Hussain contended that if the monetary and fiscal policy works in tandem growth will be higher, adding that empirical studies have shown this to be the case. SBP (State Bank of Pakistan) reduced its forward liabilities (from 5.7 billion dollars in January 2023 to 1.9 billion dollars today), enabling the government to achieve its primary surplus target, he stated.
The points asserted by Dr Hussain are indeed legitimate and have repeatedly been raised and stressed in these columns as also by independent analysts. Would they be addressed by taxation reforms that seek to strengthen the direct tax collections based on ability to pay principle? The jury is out on this.
Furthermore, will the target primary surplus be achieved through a slash in current expenditure followed by an associated decline in reliance on borrowing also appears a pipe dream and finally to attain congruity between fiscal and monetary policies; will reliance be placed on in-house expertise rather than through implementation of harsh upfront IMF (International Monetary Fund) conditions as at present is also likely to remain elusive?
Copyright Business Recorder, 2026