By Hissan Ur Rehman
In 2024, Pakistan stood at a historic crossroads. With the Pakistani rupee stabilizing and inflationary pressures easing, there was a golden opportunity to transition to a zero-interest rate economy, breaking free from the shackles of an interest-based financial model.
But instead of capitalizing on this moment, the State Bank of Pakistan (SBP) chose a conservative route buying around $9 billion in foreign reserves, most of it in the last six months of the year, thereby halting the appreciation of the rupee.
This decision, while praised by conventional analysts, was a short-term fix that came at the cost of long-term economic transformation.
Had Pakistan’s economic managers adopted a more innovative approach, the dollar could have dropped to around Rs250, triggering a wave of deflation and enabling the elimination of interest rates.
Such a policy shift would have saved Pakistan trillions in debt servicing, increased economic activity, and laid the foundation for a sustainable, interest-free financial system.
However, weak negotiating with the IMF and outdated policy thinking prevented Pakistan from seizing this revolutionary opportunity.
Why Did Pakistan Miss This Opportunity?
There are three key reasons why Pakistan’s policymakers failed to embrace this game-changing scenario:
1. Fear of a Balance of Payments Crisis
The State Bank feared that a drastic appreciation of the rupee would make imports cheaper, leading to a surge in imports and a potential balance of payments crisis.
However, this concern was short-sighted. Just as the government successfully cracked down on smuggling and money changers, it could have restricted non-essential imports while encouraging export-linked imports.
By managing imports intelligently and focusing on export-oriented industries, Pakistan could have reduced its trade deficit without relying on high interest rates.
The textile sector, IT exports, and other manufacturing industries would have thrived in a low-interest environment, increasing foreign exchange inflows and reducing dependency on loans.
2. The IMF Excuse: A Result of Poor Negotiation
Policymakers often hide behind IMF conditions as a reason for maintaining high interest rates. But this is a failure of negotiation.
The IMF is not a rigid institution it is a lender that wants to see its borrowers succeed.
The problem lies in Pakistan’s lack of competent negotiators who can present innovative, out-of-the-box solutions to the IMF.
The inflation in Pakistan is not demand-pulled; it is cost-push inflation, driven by factors like currency depreciation, fuel prices, and supply chain disruptions.
Raising interest rates does little to address these issues.
Instead, Pakistan should have convinced the IMF that zero-interest rate policies would have generated greater economic activity and higher revenues in the long run, benefitting both Pakistan and the IMF.
Here’s how:
- Higher economic growth would have led to greater tax collection.
- Increased exports would have improved Pakistan’s balance of payments.
- Reduced debt servicing (which currently costs Rs8 to 9 trillion annually) would have freed up fiscal space for development.
Pakistan’s Federal Board of Revenue (FBR) tax target is around Rs13tr, but Rs8 to 9 tr goes into debt servicing.
By eliminating interest payments, Pakistan could have saved this massive amount and directed it toward economic growth.
The IMF, as a lender, would have benefited from a more stable, prosperous Pakistan with a sustainable revenue base.
Unfortunately, our economic negotiators lack the vision and confidence to challenge the IMF’s traditional prescriptions.
Competent, visionary leadership at the negotiating table could have convinced the IMF that a low-interest, high-growth economy is in everyone’s best interest.
3. Western Economic Models Entrenched in Policy DNA
Pakistan’s economic policymakers are largely trained in Western economic models, which rely heavily on interest rates as a tool to control inflation.
This conventional thinking has blinded them to alternative models that could work better in Pakistan’s unique context.
An interest-free economy is not a radical idea it is deeply rooted in Islamic finance principles and offers a more equitable, sustainable financial system.
Yet, our policymakers are unable to break free from their reliance on interest-based policies, even when presented with a clear opportunity to do so.
It’s time for bold, out-of-the-box thinking that challenges the status quo and embraces alternative financial models.
Pakistan’s policymakers must unlearn the Western economic playbook and rethink their approach to monetary policy.
What Could Have Been: The Path to an Interest-Free Economy
Had the State Bank allowed the rupee to appreciate and pursued a zero-interest rate policy, Pakistan could have:
- Reduced inflation through deflation, lowering the cost of living for citizens.
- Boosted economic activity, particularly in export-oriented sectors like textiles, IT, and agriculture.
- Lowered borrowing costs, making it easier for businesses to expand and create jobs.
- Saved Rs8 to 9tr in annual debt servicing, freeing up funds for development.
- Generated higher tax revenues through increased economic activity and exports.
- Transitioned to an interest-free financial system, in line with Islamic finance principles.
The textile sector, in particular, would have boomed in a low-interest environment, becoming more competitive globally and driving a surge in exports.
Other sectors, including agriculture, pharmaceuticals, and services, would have followed suit, creating a virtuous cycle of growth and prosperity.
A Missed Revolution: The Cost of Conventional Thinking
The decision to maintain high interest rates and buy dollars to stabilize reserves was a short-term fix at the expense of long-term economic transformation.
By opting for conventional policies, Pakistan’s economic managers missed a once-in-a-generation opportunity to:
- Break free from interest-based systems.
- Achieve sustainable economic growth.
- Transition to an Islamic financial model.
Pakistan’s policymakers continue to rely on the IMF as a scapegoat, blaming its conditions for their inability to implement bold reforms.
But the truth is that competent negotiators could have convinced the IMF of the benefits of a zero-interest rate economy.
The Way Forward: Embracing Bold, Out-of-the-Box Thinking
Pakistan needs visionary leadership at the helm of its economic policy. We must:
- Reframe negotiations with the IMF, presenting a case for zero-interest policies that drive economic growth and increase revenues.
- Adopt policies that encourage exports and manage imports smartly, rather than relying on interest rates to control inflation.
- Embrace Islamic finance principles, transitioning toward a more equitable, sustainable financial system.
The excuses of the past balance of payments fears and IMF conditions no longer hold water.
What we need is courageous, innovative leadership that can challenge outdated thinking and put Pakistan on the path to prosperity and financial sovereignty.
It’s time for Pakistan to think beyond conventional economics and seize the opportunity to build a truly interest-free economy. The question is: Do we have the leadership to make it happen?
The writer is a graduate of LUMS and MBA in Consulting from UK. He teaches financial markets in Pakistan and can be reached at hissan3@gmail.com
Posted on: 2025-01-13T09:44:36+05:00