By: Ahmad Saleem
In recent times, the State Bank of Pakistan (SBP) has made persistent efforts to stimulate the economy by reducing interest rates. However, these measures have failed to ignite the kind of economic activity needed to lift the country out of its sluggish growth trajectory. The reasons for this are deeply rooted in the structural weaknesses of the economy, the psychological scars left by decades of boom-and-bust cycles, and a hostile business environment exacerbated by regressive tax policies.
The SBP has persistently been reduced the interest rate ever since inflation has started to go down. The logic behind this move was straightforward: lower borrowing costs would encourage businesses to invest, consumers to spend, and investors to take risks. In theory, this would spur economic growth, create jobs, and boost productivity. However, the reality has been far from the textbook outcome.
Despite the reduction in interest rates, private sector credit uptake has remained tepid. Businesses are hesitant to borrow, not because the cost of capital is too high, but because they lack confidence in the economic environment. This reluctance is a symptom of a deeper malaise: decades of volatile economic cycles have left investors and consumers alike wary of the future. Pakistan’s history of inflationary spikes, currency devaluations, and sudden economic contractions has created a pervasive sense of uncertainty. People are no longer willing to bet on the future; they are too busy preparing for the next bust.
Pakistan’s economy has been characterized by a series of boom-and-bust cycles, often driven by external shocks, poor policy choices, and structural imbalances. For instance, the commodity price boom of the mid-2000s led to a period of rapid growth, but this was followed by a sharp contraction when global prices collapsed. Similarly, short-term injections of foreign aid or remittances have provided temporary relief, only for the economy to falter once these inflows dried up.
These cycles have left deep psychological scars. Investors, both domestic and foreign, are wary of committing capital to an economy that has repeatedly failed to deliver sustained growth. Consumers, too, are cautious. Even when interest rates are low, they prefer to save rather than spend, fearing that inflation will erode their purchasing power or that another economic crisis is just around the corner. This collective anxiety has created a vicious cycle: low investment leads to low growth, which reinforces the lack of confidence, further dampening investment.
Compounding these challenges is the role of the Federal Board of Revenue (FBR), Pakistan’s tax authority. Rather than focusing on broadening the tax base and bringing more people into the formal economy, the FBR has adopted a strategy of squeezing existing taxpayers for more revenue. This approach has created a hostile environment for businesses, particularly small and medium enterprises (SMEs), which are the backbone of any economy.
The FBR’s aggressive tactics have included arbitrary tax assessments, frequent audits, and onerous compliance requirements. For many businesses, the cost of dealing with the tax authorities—both in terms of time and money—has become a significant burden. This has discouraged formalization and incentivized tax evasion, further shrinking the tax base. The result is a lose-lose situation: the government struggles to meet its revenue targets, while businesses face an increasingly difficult operating environment.
This focus on extracting more from existing taxpayers has also stifled innovation and entrepreneurship. Start-ups and new businesses, which are critical for job creation and economic dynamism, are particularly vulnerable to the FBR’s heavy-handed approach. Without a supportive ecosystem, these enterprises are unlikely to thrive, further limiting the economy’s growth potential.
For Pakistan to break out of its current economic stagnation, it must address the root causes of its malaise. This requires a two-pronged approach: restoring confidence in the economy and reforming key institutions.
First, the government must take decisive steps to stabilize the economy and reduce uncertainty. This includes implementing sound fiscal policies, controlling inflation, and ensuring a stable exchange rate. While these measures may be painful in the short term, they are essential for rebuilding trust. The State Bank’s efforts to reduce interest rates are a step in the right direction, but they must be accompanied by structural reforms that address the underlying causes of economic volatility.
Second, Pakistan must reform its tax system to create a more business-friendly environment. This means shifting the focus from squeezing existing taxpayers to broadening the tax base. The FBR should work to simplify tax procedures, reduce compliance costs, and incentivize formalization. At the same time, the government must crack down on tax evasion and ensure that all sectors of the economy, including agriculture and real estate, pay their fair share.
In addition to these measures, Pakistan must invest in human capital and infrastructure to unlock its long-term growth potential. A well-educated and skilled workforce, coupled with reliable energy and transportation networks, would make the country more attractive to investors and create the conditions for sustained economic growth.
Pakistan’s economic challenges are not insurmountable, but they require bold and decisive action. The State Bank’s efforts to stimulate the economy through lower interest rates have been undermined by a lack of confidence and a hostile business environment. Until these issues are addressed, the economy is likely to remain stuck in a low-growth trap.
The government must recognize that economic growth is not just about numbers; it is about people. Restoring confidence, reforming institutions, and creating a more inclusive and supportive environment for businesses are essential steps on the path to prosperity. Without these changes, Pakistan’s economy will continue to underperform, leaving millions of its citizens trapped in poverty and uncertainty. The time for action is now.
The writer is a freelance columnist.
