Pakistan’s fiscal policy at a crossroads

Fiscal policy in Pakistan is usually far from a fine balancing act and is more of a reckless feat. It has long been marked by a contentious debate between austerity and stimulus measures – with the government oscillating between these two approaches, often thoughtlessly. Thanks to these policies, the past three years have been marked by high interest rates – a result of the State Bank of Pakistan (SBP)’s fight with inflation that has crushed the real estate market and raised unemployment numbers. But why Pakistan’s policy rate must be as high as 22% for so long remains a burning question. The root of this problem lies in the extravagant expenditures of the government’s machinery that includes salaries, pensions and other privileges coming in at around Rs5 trillion. These expenditures in the past and as of now have been funded by expensive debt and currently interest payments alone eat the bulk of the federal budget.