High interest rates cost Pakistan Rs3 trillion in extra payments

KARACHI  – The State Bank of Pakistan’s Monetary Policy Committee (MPC) has reduced the policy rate by only 1 percentage point — from 12% to 11% — since January 2025, maintaining one of the highest real interest rates in the region at around 8.5% on average over the past year.

This cautious monetary approach has resulted in an estimated Rs 3 trillion in additional interest payments on the government’s Rs 50 trillion domestic debt, putting further pressure on public finances.

Read more: SBP keeps policy rate unchanged at 11%

Economists warn that such high-interest-rate policies are inflating government borrowing costs, discouraging private sector investment, and pushing the state toward heavier taxation — a cycle that slows economic growth while increasing debt dependency.

In a striking comparison, the Rs 3 trillion spent on extra interest payments to contain inflation surpasses Pakistan’s entire defence budget, underscoring the fiscal burden created by tight monetary policy.

Analysts emphasize the need for a balanced approach to monetary easing to stimulate growth without reigniting inflationary pressures.