Published June 11, 2026 Updated about 2 hours ago EDITORIAL: Pakistan is simultaneously running tight fiscal and monetary policies through primary fiscal surpluses and positive real interest rates. Growth has been compromised as a result of these stabilization efforts. However, these policies apparently are being pursued in silos, without proper coordination, they are also stoking inflation, which, after declining last year, is on the rise again and has prompted a 100 basis points (bps) increase in the policy rate in the latest monetary policy review by the State Bank of Pakistan (SBP). The government may pass the buck to the IMF (International Monetary Fund) by arguing that these measures are mandatory under the programme. The real question, however, is why these conditions were accepted in the first place, especially under the Resilience and Sustainability Facility (RSF). Policy institutes have also highlighted this concern. According to a research paper by the Policy Research and Advisory Council (PRAC), fiscal policy is injecting cost-push inflation through the petroleum levy (PL). Consequently, the SBP is increasing the policy rate to counter inflation which, in turn, hikes the government’s borrowing cost, given that it is by far the largest borrower from the banking system. To keep the fiscal deficit under control, the government then imposes new taxes. Higher borrowing costs and exorbitantly high tax rates have, overall, discouraged capital formation and kept investment low. The country needs to break this vicious cycle in the upcoming budget. A few years ago, Pakistan began increasing the petroleum levy to generate federal revenues that do not form part of the divisible pool and therefore are not shared with the provinces. Its yield for the federal government is around 2.5 times more efficient than FBR taxes, 57.5 percent of which have to be transferred to the federating units under the National Finance Commission Award. Initially, the government increased the petroleum levy while reducing the GST rate on petroleum products to zero. That was understandable, as the PL essentially replaced GST. However, unlike GST, which had a ceiling of 17-18 percent,…