The issue of full autonomy for the State Bank of Pakistan is a long standing one but has not yet been fully resolved. During the Extended Fund Facility (September 2013-16), the PML-N government maintained that autonomy had been granted to the SBP, as envisaged under the Fund programme. However, in March 2018, the Fund said in its report on the First Post-Programme Monitoring discussion that “going forward greater exchange rate flexibility will need to be accompanied by further adjustment of the policy stance as well as strengthening of the interest based monetary policy framework with appropriate immediate and operational monetary policy targets and a clear limit to foreign exchange interventions.”
The IMF report did not mention price stability, a standard function attributed to the central banks in other countries, no doubt because Pakistan does not have perfectly competitive markets due to proliferation of cartels and the price of even produce based on the seller’s perception of the buyer’s ability to pay as well as the government’s reliance on taxing utilities to generate a major portion of its revenue.
Opinions differ whether state bank autonomy is desirable or not. Joseph Stiglitz, a Nobel laureate, is on the side of those opposed to granting autonomy and while delivering a speech on the 2007-08 financial crisis he stated: “the crisis has shown that one of the central principles advocated by Western central bankers – the desirability of central bank independence – was questionable at best…In the crisis, countries with less independent central banks – China, India, and Brazil – did far, far better than countries with more independent central banks, Europe and the United States. There is no such thing as truly independent institutions. All public institutions are accountable, and the only question is to whom.”
On the other hand, Tonny Lybek, an IMF staff member, in a paper titled “Central Bank Autonomy, Accountability and Governance: Conceptual Framework” categorically stated that the “the IMF supports central bank autonomy and accountability, since it facilitates price and financial sector stability, which are conducive to sustainable economic growth.” He further argued that the reason for the support is that “in the short term the government has many competing objectives including being reelected,” but then emphasized the need for a clear mission statement for a central bank identifying: (i) a goal autonomy (that allows the central bank to set its own goal which is the broadest form of autonomy); (ii) a target autonomy with one clearly defined primary objective stipulated in the law. The IMF’s First Post Program Monitoring report urged the government to do precisely this but added multiple clearly defined objectives; or (iii) limited or no autonomy which has been the case with the SBP whereby it is regarded as almost a government agency.
The SBP’s mission statement does not indicate a specific target and its objectives and goals are too wide to be labelled as autonomy. The SBP’s website states, “The State Bank of Pakistan is incorporated under the State Bank of Pakistan Act, 1956, which gives the Bank the authority to function as the central bank of the country. The SBP Act mandates the Bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources.” SBP Vision 2020 includes five pillars: (i) enhance effectiveness of monetary policy by strengthening its independence and implementing a framework for inflation targeting that balances the need for price stability with economic growth; (ii) strengthening the financial system stability; (iii) improving efficiency and effectiveness and fairness of the banking system; (iv) increasing financial inclusion; and (v) developing modern and robust payments systems.
The recent statements by the members of the executive against the SBP’s decision to allow the inter-bank rate to depreciate on the day following the 100-day celebrations organised by the ruling party indicates the need for some mechanism of conflict resolution, so stated the prime minister and the finance minister. This is baffling given that such a mechanism already exists (minister of finance chairs the Monetary and Fiscal Policies Coordination Board – established in 1994 – which is required to meet on a quarterly basis and envisages “coordination of fiscal, monetary and exchange rate policies”); and this very Board met on the same day as the 100-day celebrations. Governor SBP also told the relevant Senate panel that the government was informed before the depreciation.
This Board is represented by five members of government and only the governor SBP represents the central bank. It also takes all major decisions including “consider limits of the Government borrowing as revised from time to time in the meetings to be held before and after passage of the annual budget…. review the level of Government borrowing in relation to the predetermined or revised targets after every quarter.” The government has already borrowed in excess of 3 trillion rupees during the first four months of the current fiscal year, a level that does not indicate prudence by the central bank though it does indicate that this was a directive of the federal government. The Monetary Policy Committee, an independent body responsible for formulating the monetary policy, also has six out of ten members appointed by the federal government (including three senior executives of the SBP and three outside economists) and the chair of the MPC notably the governor is also appointed by the federal government.
It is necessary for the PTI to set primary objectives and specific target for the SBP before it announces it has given autonomy to the State Bank. The PTI has so far shown a singular lack of any effort to de-link the process of appointments/nominations from the executive and selections continue with the premise that their choice is going to be better than their predecessors, a view it shares with previous administrations though the passage of time showed that their selections were flawed. Additionally, the PTI must also change the components of the Board and the MPC if it wants the central bank to become truly autonomous.