Policy-driven rent-seeking

Rent-seeking refers to exploiting an economic environment to extract undue premiums without contributing to productivity, innovation, or value creation for the wider economy.

In Pakistan, governments, whether political or autocratic, have historically implemented economic policies, including monetary policy adjustments, tariff protections, tax incentives, and subsidies, to integrate underperforming sectors with mainstream economic development.

However, most of the time, these policies end up helping people who are already rich, leading to situations where people try to secretly enjoy benefits that weren’t meant for them, helped along by each new government since independence.

This analysis begins with monetary policy in Pakistan, which has been characterised by a policy rate of 22 per cent since last year.

This high policy rate poses a significant challenge for startups, small and mediumsized enterprises, and other growing firms in securing financing.

The backdrop of high cost-push inflation has reduced firms’ profit margins, complicating their ability to expand operations. The annual percentage rates for microcredit range from 25pc to 35pc, with conventional banks offering similar rates, thereby exacerbating the difficulty of obtaining affordable loans.

Moreover, the Pakistani economy urgently needs to boost exports to maintain a balanced foreign trade. However, the high cost of financing, whether through debt or equity, surpasses the real rate of return, hindering the enhancement of local production.

This scenario has led investors to prefer depositing their funds in savings accounts, which offer a risk-free return exceeding the real market return. Consequently, this preference not only undermines the business ecosystem, acting as a barrier to growth but also escalates the state’s debt servicing costs, given that 87pc of bank deposits are loaned to the state.

Intriguingly, state-owned enterprises deposit more than Rs6 trillion of the Rs23tr in bank deposits, receiving lower returns while the state incurs higher borrowing costs.

This results in the state earning a lower premium on one hand and bearing elevated debt expenses on the other.

Because of the prevailing monetary policy, banks have inadvertently become the primary beneficiaries, realising significant billion-dollar profits from the interest rate spread. This outcome, while advantageous for banks, further complicates the economic landscape.

Monetary policy’s intended objective is to regulate the money supply and curb inflation.

However, this policy has inadvertently increased cost-push inflation and exacerbated economic inequality. This situation aligns with Thomas Piketty’s analysis, which posits that inequality intensifies when the rate of return on capital outpaces economic growth.

The result is capital income growing more rapidly than wages and output, thereby concentrating wealth among the already affluent and amplifying the disparities between those less so, thereby challenging the fundamental goals of monetary policy.

Regarding fiscal policy, Pakistan has pursued a path towards trade liberalisation since its accession to the World Trade Organisation (WTO) in 1995. Import tariffs, which averaged 54.7pc during 1990-1999, were reduced to approximately 30pc by 2001 and further declined to an average of 10pc to 12pc by 2019. Despite these significant tariff reductions, Pakistan’s economy continues to be notably protected due to a selective liberalisation strategy.