LAHORE: Pakistan has created a complicated web of exemptions, concessions, special tax treatments and protective tariffs over the years. These privileges may have been introduced with specific objectives, but many have survived long after their original justification disappeared.
The economy is discussed everywhere in Pakistan. Every segment of society has its own diagnosis and, naturally, a solution that suits its interests; industrialists want cheaper energy and credit, exporters seek a competitive exchange rate, consumers demand lower prices, traders’ resist taxation, while the salaried class wants relief from the ever-expanding tax burden.
The problem is that Pakistan’s economic crisis cannot be resolved through segment-specific solutions. The economy is an interconnected system. If one equation is disturbed, its consequences appear elsewhere.
Exchange-rate management is often presented as an alternative to controlling inflation. Lower interest rates are demanded as a substitute for fiscal discipline, and subsidies are offered as a solution to rising living costs. These may provide temporary relief, but they cannot correct structural weaknesses. The country’s repeated boom-and-bust cycles have demonstrated one basic truth: economic stability requires the right priorities in the right sequence.
When prices rise persistently, real incomes decline, purchasing power erodes and businesses lose the ability to plan. Consumers cut spending, investors become cautious and economic activity increasingly turns speculative. Trying to control inflation by artificially holding down the exchange rate only postpones the problem.
As such, currency stability cannot be created through administrative measures and the same principle applies to interest rates. Cutting rates prematurely may provide a short-term boost to economic activity, but if inflation has not been durably contained, cheaper money can reignite demand, intensify pressure on the rupee and eventually force the central bank to tighten policy again.
Sustainable growth cannot simply be switched on by lowering interest rates. It emerges when inflation is under control, borrowing costs are predictable, energy is reasonably priced and foreign exchange markets are stable.
The first fiscal priority should be to eliminate blanket and untargeted subsidies. Pakistan continues to subsidise power, gas, agriculture and other areas in ways that often fail to benefit those who need assistance most. Such subsidies burden the budget and distort the economy.
When tariffs remain below the actual cost of supplying energy, the resulting losses accumulate throughout the energy chain and contribute to the circular debt. The government then has to inject more money into the system or borrow to meet its obligations.
Furthermore, blanket subsidies can often be regressive. A wealthy household consuming large quantities of electricity or fuel receives a much larger implicit subsidy than a poor household consuming very little. The policy therefore spends scarce public resources without necessarily reaching those that need help most.
Assistance should instead be targeted directly at those who need it. Programmes such as Benazir Income Support Programme provide a much more rational framework for protecting vulnerable households than subsidising consumption across the entire economy. Some sectors and businesses enjoy policy protection while the burden of taxation falls disproportionately on those who cannot escape the formal system — particularly salaried workers and compliant businesses.
The abolition of unnecessary statutory regulatory orders, exemptions and special concessions would certainly create resistance. Some prices could rise temporarily as artificial advantages disappear. But this is precisely why reform is difficult — and necessary.
Pakistan’s recurring dependence on emergency external financing is therefore not simply the result of bad luck or an unfortunate succession of external shocks. External shocks matter, but their impact becomes severe because of weaknesses that already exist within the economy. The country cannot borrow its way out of these structural weaknesses indefinitely.
Political leaders may find it easier to announce subsidies, concessions and tax exemptions than to dismantle them. But every temporary concession creates a future cost, and every distortion that is allowed to survive makes the eventual correction more painful.
The path is as follows: stabilise prices, discipline public finances, end indiscriminate subsidies, remove privileged taxation, make markets competitive, encourage productive investment and then, let sustainable growth follow.
