It pays to know people in power.

I am not sure whether the above qualifies as an economic theory, but if economics was to adopt it, it may turn out to be the only economic theory which can be proven in the real world. Being part of a powerful fraternity ensures circular profits. This on the other hand is an economic theory- albeit it is carefully disguised within a plethora of economic thought such as neo-liberalism, monetarism and trickledown theory to avoid calling a spade a spade; ideally this is the Reverse Robin Hood Theory.

By the way, a clarification- this article is an attempt at humour; not satire, and the article definitely does not have anything to do with reality.

So in this humorous world, the most powerful fraternity in the world is the Fraternity of Finance and Banking with its head office residing in the good old US of A; not economists, who perhaps are a close second now, and definitely not accountants, unfortunately!

And how does it work? Let's take the example of Pakistan.

As of November 2019, according to the State Bank of Pakistan (SBP), our Government's domestic debt and liabilities stand at Rs 21,892 billion. According to the conditions laid down by the IMF in its recent program, and enforced diligently this time around, the Government cannot anymore borrow from the SBP and is therefore forced to borrow at market rates from the market, mostly the banks.

Except market rate is not really market rate since it is determined by the fraternity itself based on an economic theory which insists that inflation is caused by interest rates. Notwithstanding that this theory eludes common sense; a little while ago interest rates were doubled in a span of less than a year, essentially meaning that the Government, as the single largest borrower, ended up paying a much higher interest cost on its domestic debt.

In FY 2018 interest payment on government domestic debt was Rs 1,330 billion which jumped to Rs 1,764 billion in FY 2019 (SBP numbers); a safe ball park estimate, on the conservative side, for FY 2020 can thus be around Rs 2,100 billion. More likely than not, total interest payments, including that on external debt, can touch Rs 3,000 billion; which is expected to be more than the Federal Governments share of revenue receipts- mostly the taxes collected by Federal Board of Revenue (FBR). In fact, to venture a guess, this year, total debt servicing of the Federal Government is likely to exceed all the taxes collected by FBR.

This appears ominous, but don't worry, if you look at primary deficit and even better, look at everything as a percentage of GDP, things look hunky dory; except that again a common sense question remains unanswered- primary or secondary, or as a percentage of anything, the Government still has to borrow more; does it not?

Nonetheless, to pay the banks more the government had to collect more taxes from the masses, discontinue all development funding, and since even that was not enough to pay for debt servicing, the Government has to keep borrowing more from the banks. Fortunately because of interest rates doubling, banks doubled their profits, so they can lend more to the Government. Obviously the government cannot raise the taxes on banks, because it might upset them, and you should not want to upset your creditors, and in any case that would be a circular tax; if tax went up, interest rates will have to go up further to fight inflation or something else, so what's the point!

In substance therefore, all of us are working day and night, to pay taxes, which keep increasing, so that our Government can pay the banks higher interest in order for them to be more profitable and lend more money to the Government. And the best part is that the money the banks lent to the Government in the first place was not even their own money, it is our savings. This raises another interesting point, if the only purpose of banks was to lend our savings to ourg, why did we privatise the banks?

Seriously, if the banks can make money via risk free lending to the government, and can also make profits because of the currency devaluation whilst doing absolutely nothing, which devaluation by the way is said to be good for exports and hence the economy, then why would they even consider lending to anyone else and assume credit risks, which could interfere with their carefree living!

And let us not even discuss why banks can get away with a CAR which is much less than the 40% equity they expect their borrowers to have, if they do ever think of lending to the private sector. Again courtesy the fraternity, Basel III came up with some seemingly kosher reasoning for why banks can have low equity.

Does it not make you want to open a bank? Except that you cannot!

Understandably, the fraternity will not be pleased with any of the above, and admittedly there are multiple theories which can be called upon to defend the interest rates, and argue why it is best for the Government to borrow at market rates, and how all of this is necessary for stabilizing the economy.

But hey, don't get your knickers in a knot, I clarified at the beginning, all of this was humour!

So in this humorous world, let's all of us work harder, to pay more taxes, so that the Government can pay even more to the banks who can than lend even more to the government, all of which for some inexplicable reason will supposedly stabilize the economy; and so what if the banks in the process make circular profit!

(The writer is a chartered accountant based in Islamabad. Email: syed.bakhtiyarkazmi@gmail.com. The views expressed in this article are personal. The views are not necessarily those of the newspaper)