The traditional response to lower borrowing costs is positive and enthusiastic. Pundits pontificate that availability of credit at affordable rates is the catalyst for promoting both industrial and agricultural production and thereby ensuring economic growth.

In developing countries lowering of lending rates usually coincides with the implementation of measures to discourage and penalize private consumption through increased rates of personal taxation, and high import duties and sales taxes, or import restrictions.

Thus it is ensured that the increased flow of inexpensive lending is channelised towards the productive sectors instead of to fuelling a consumer-spending boom.

In Pakistan, the government's voracious appetite for funds to finance burgeoning budget deficits throughout the 90's led not only to very high interest rates but also to a "crowding out" of the private sector.

The profligacy of the Nawaz Sharif and Benazir governments resulted in massive revenue shortfalls that were plugged by borrowings at very high and ever-increasing rates.

This occurred despite the fact that the watchdogs of the IMF were permanently stationed in the finance ministry in a futile and desperate attempt to micro-manage the finances.

Ever-increasing rates of return were offered on the government national saving schemes (NSS). In November 1996 the government announced the highest-ever rates of return on investment in defence savings certificates: Rs100 would accumulate to Rs525 in 10 years. In the final three years of the ten-year holding period the annual rates of tax-free return ranged between 20 to 22.5 per cent.

The periodic auction of public debt was also impoverishing the government.Rates on short-term treasury bills were as high as 18 per cent per annum in mid-1997.

Lending money to the government thus became the biggest and the most profitable business activity. The banks were the largest beneficiaries of this largess. Not surprisingly they were investing far greater sums in government securities than those warranted under the statutory liquidity requirements (SLR) of the State Bank of Pakistan (SBP).

Since interest rates overseas were only a fraction of those offered locally by prime borrowers like the government, and because foreign currency deposits were covered by exchange risk guarantees carrying premiums of 4-5 per cent per annum (as compared to annual rupee devaluation of 15 per cent), banks started to revive enormous inflows of foreign currency deposits.

These were placed as collateral for rupee borrowings, and the proceeds of such borrowings were invested in government securities to earn handsome risk-free returns.

How long could the government go on borrowing at such ruinously high rates? The government's debt-servicing burden has become the single biggest head of expenditure in the national budget.

At this stage came Shaukat Aziz, finance minister of choice and a banker with decades of experience. His sympathies lay with his fellow bankers. They had long-standing complaints about their inability to reduce lending rates in the presence of the very high tax-free returns paid by the government on the NSS.

These they argued placed them at a disadvantage when it came to mobilising deposits. They were compelled to offer correspondingly high rates of return to depositors, though they could neither hope to match those of the NSS nor offer any additional incentives such as tax-free returns. The bankers maintained that the high rates of return offered on NSS were the sole and basic cause of the excessively high cost of funds borne by the banks.

They argued further that until and unless their cost of funds was lowered they could not bring down their lending rates. It was no mere coincidence that the biggest beneficiary of lower lending rates would be the government itself.

Thus under the tutelage of the IMF the finance minister embarked on an odyssey to lower lending rates in the country. Not only were the rates of return on NSS slashed mercilessly every six months but they were also subjected to taxation, with the threshold for tax-exemption being lowered periodically.

Within a few half-years after-tax returns on NSS had come down to 40 per cent of their pre-Shaukat Aziz levels. Not unexpectedly there was an outcry from the elderly pensioners had widows whose lone source of income was the return on their NSS holdings.

But the IMF's writ prevailed. There was no going back. The reduction in NSS rates of return compelled the banks to lower their rates on deposits as well, and consequently their lending rates too fell, to unprecedentedly low levels. People dependent on income from government investments and bank deposits watched helplessly as their earnings shrank. The cost of living though keep on climbing.

The widely touted decline in inflation cited as the justification for reducing rates of return on NSS has not translated into any significant relief for the common man.

It appears to be mere propaganda. The sad truth is that it is that it is the government-administered price that continue to show the steepest increase. The prices of POL products are revised every 15 days, usually upwards. The charges for electricity, gas, postage etc as well as the support prices for staples such as wheat and sugar are also enhanced every few months.

In response to a public outcry the government introduced a special scheme for pensioners who have retired from the government and the armed forces (or their widows) offering a high rate of return on their investment in NSS.

This rate is almost twice that available to other investors. But there is an upper limit on the amount of individual investment in this scheme: no one can invest more than one million rupees. A similar scheme has been announced for all persons over the age of 60.

The introduction of such schemes is evidence of the acknowledgement by the government of the fact that interest rates have declined only because of a sharp reduction in the government's demand for funds, and not because of a lowering on inflation rates or improvement in any other economic fundamentals.

However the greatest damage that lower interest rates inflicted on society is the promotion of rampant consumerism. The banks are awash with liquidity. The large inflows of foreign remittances have swelled their deposit bases.

Demand for credit from the corporate and commercial sectors is stagnant. Banks have therefore started to discourage deposits by prescribing minimum levels for balances, below which service charges are imposed.

Customer loyalty of the retail depositor built up over generations is being jeopardised for a few rupees. Left with no outlet for lending the banks have zeroed in on consumer financing.

Loans are available for a range of personal spending, from the traditional consumer durable to those for performing Umra and for foreign vacations.

Loans for car purchase, which less than two years ago carried annual interest rates of 22 per cent and more, are now available at less than 8 per cent. Additional incentives such as free insurance are thrown in, to lure customers.

No wonder one-third of new car sales are now financed by banks. Air-conditioners and refrigerators are also available on the instalment plan, and so anxious are the banks to provide financing for their purchase, they arrange for the items to be delivered at your doorstep.

This is the American model. Spend your way out of a recession. Cheap finance for housing is also freely available, and housing starts provide a good boost to the economy. However this incentive is stillborn because of the phenomenal increase in construction material. Steel that was selling a year ago at Rs19,000 per ton is now available at more than Rs30,000 a ton.

The prices of cement and other basic construction materials have also skyrocketed. Housing starts have in fact become housing suspended and deferred.Admittedly in the west consumer spending does provide a fillip to domestic manufacturing and services.

In Pakistan though increased borrowing has mainly financed higher spending on consumer durables, which are all imported goods. This is just leading to a sucking-in of imports. The easy availability of cars is leading to congestion on the roads and pollution of the atmosphere.

Oil imports also have to keep on rising to keep pace with higher demand. So this policy of easy credit is depleting our foreign currency reserves. Is this a fair and equitable trade-off?