The govt is becoming increasingly sophisticated about debt management. Is it too little too late?

There are, very basically speaking, two different tools at the disposal of any government to manage the economy. The first is fiscal policy, which essentially is how the government chooses to implement and collect taxes and then spend them. It is a pretty simple operation. The government needs money, and it gets it through taxation. The more it is able to collect, the more it can spend (or save). 

And then there is the second tool. Monetary policy. Economists will lecture you for hours about the importance and nuance of how a country’s monetary policy is controlled by its central bank or federal reserve or whatever terminology a state has for its banking regulator. But essentially, monetary policy is essentially a massive lever. Pulling it can either increase or decrease the interest rate, thus determining how cheap or expensive it is to borrow. 

The trick that every government has had for the past century has been balancing these two sides. In countries like Pakistan, where debt obligations are overwhelming, governments often respond by trying to completely control and dominate both these tools. 

Pakistan stands as a stark example of how this situation can deteriorate if left unchecked. This phenomenon has become increasingly pronounced in emerging economies where the line between fiscal and monetary policy grows increasingly blurred, often at the expense of economic stability and growth potential.

Between fiscal years 2022 and 2024, Pakistan’s economic landscape has been particularly challenging, with domestic debt forming a significant portion of the government’s total liabilities. 

This predicament has forced three major consequences upon the country’s economic decision-makers: 

1. Record-high interest rates to protect the currency and control inflation
2. Paralysis of the financial sector leading to private sector credit crowding out
3. A broader loss of confidence among investors and workers

The ripple effects have been felt across all sectors of the economy, from small businesses struggling to access credit to large corporations facing increased borrowing costs.