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 medium-sized enterprises, and other growing firms in securing financing.

Current monetary policy benefits the wealthy while exacerbating economic inequality due to rising cost-push inflation

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.

A study conducted by Research for Social Transformation & Advancement at the Pakistan Institute of Development Economics points out that the 2013 International Monetary Fund programme, which was adopted by a government closely associated with powerful business interests, sought to implement trade reforms through the simplification of tariffs and the elimination of exemptions.

However, this initiative inadvertently provided advantages to sectors with strong political ties — special interest groups — thereby highlighting the intricacies of Pakistan’s trade protection framework.

Between 1996 and 2021, certain groups gained increased trade protection regardless of whether the government was democratic or authoritarian. This trend is consistent with patterns seen in other developing countries, where, contrary to expectations, trade liberalisation has actually increased the advantages these groups receive.

Specifically, while the overall average tariff is 12pc, the tariff on consumer goods is significantly higher at 35.4pc, positioning Pakistan as having the second-highest tariff in this category globally, after Egypt, at 57.7pc.

The introduction of alternative trade protection mechanisms, including various import duties and non-tariff measures, has counterbalanced the decrease in tariffs. Notably, regulatory and additional customs duties were introduced in 2008, with notable increases in 2013 and a subsequent moderate rise in 2016.

Distinct from tariffs, which necessitate parliamentary consent, these duties merely require the federal cabinet’s approval. Initially introduced to address current account deficits through import restriction and generate revenue, they are enacted through Statutory Regulatory Orders (STOs).

These STOs permit specific exemptions and further complicate the trade protection landscape for these special groups. These groups received substantial subsidies exceeding Rs1.3tr last year, while the deficit surpassed 6pc of GDP.

In the real estate sector, over 90pc of agricultural land is exempt from taxation, and numerous tax exemptions are available for real estate developments. Tax exemptions and concessions were accessible to developers and builders who met specific criteria, including selling at least 50pc of plots and finalising sales for a minimum of 40pc of plots, houses, or flats.

Furthermore, participants in amnesty schemes were not required to disclose their income sources and received substantial tax benefits worth billions of rupees.

The sole strategy for revitalising the economy, fostering a healthy business environment, and reducing deficits involves the Pakistani state reducing its economic footprint, phasing out subsidies, and liberalising the economy. This approach will allow the market to autonomously develop its ecosystem, enhancing production, decreasing imports, and curbing inflation domestically.

The writers are professors at the National University of Modern Languages, Islamabad

Published in Dawn, The Business and Finance Weekly, April 8th, 2024