Resisting political pressure for populist measures is the only way Pakistan can ensure sustainable economic growth and financial stability.
The country has struggled with persistent fiscal deficits throughout its history, hampering economic growth and financial stability. These fiscal deficits—when government expenditures exceed revenues—have led to repeated cycles of borrowing, inflationary pressures, and external vulnerabilities. The cautious approach adopted by the State Bank of Pakistan (SBP), if coupled with effective implementation of reforms, offers hope for more sustainability.
The primary culprits for Pakistan’s chronic fiscal imbalances have been high government spending, low tax revenues, and reliance on external and domestic borrowing. Large subsidies, inefficient public-sector enterprises, and high defense spending have further strained government finances. To make up the difference, the country has resorted to deficit financing, borrowing from domestic banks, international lenders, or even printing money to cover expenses. This has fueled inflationary pressures and depreciated the Pakistani rupee, worsening economic instability.
The International Monetary Fund, as the lender of last resort, has bailed out Pakistan 25 times since 1958. Each loan program comes with promises of structural reforms that fall by the wayside as the economy stabilizes. There are growing calls for similar backslides, particularly from industrialists grumbling over the SBP’s cautious monetary policies. The government must support the central bank in resisting such pressures.
The autonomy granted to the SBP in 2021 officially delinked it from political influence. Since then, the central bank has restricted direct borrowing by the government, facilitating fiscal discipline. In recent years, amidst backbreaking inflation peaking at 38%, the SBP has controlled inflation through interest rate adjustments and exchange rate flexibility. By prioritizing inflation control, the central bank has indirectly encouraged the government to adopt more sustainable fiscal policies. There are indications of this, with the withdrawal of subsidies in the gas and electricity sectors and a move to tax agricultural income and penalize evaders.
Stronger revenue generation, expenditure control, and financial discipline are essential. The SBP has laid the foundation for fiscal stability, but its success depends on political will. If the government can resist pressures to reverse long-overdue structural reforms, Pakistan may finally see an end to its decades-long cycle of economic crises and march toward sustainable prosperity.