The State Bank of Pakistan Amendment Act (SBPAA) was passed into law in early 2022 with the strong insistence of the IMF. The law was more so a reflection of the IMF’s ideological spin rather than of the local requirements of Pakistan. The law totally re-envisaged the central bank’s role in the country, and essentially sought to make the monetary authority into a separate pillar of power, one that the IMF could speak to in its own “native language”, one might say, of technocrat-economists without any democratic or pro-people inklings. The SBPAA would thus be their map, on our territory, as I wrote.
At CASS, we did extensive work on the SBPAA, including a working paper, as well as a webinar inviting global and local experts on monetary policy to share their various views on the SBPAA. Some saw a certain merit in the law, while others were explicitly critical of not just the letter, but also the spirit of the SBPAA, and with good reasons. But now that more than 18 months have passed, we can do some ex-post reflection on what the SBPAA has accomplished, relative to its stipulated intent. The analysis can be disaggregated along four parts: functional independence, statutory independence, and inflation targeting, and lending to the government. The conclusion is that the SBPAA has failed on all four accounts.
First, the SBPAA aimed to make the SBP more removed from political interventions through greater statutory independence. This would involve pushing back against government intrusion, and make the SBP into a pillar of self-contained monetary power. What has happened since 2022, however, is that the SBP has become more subservient to the government, towing the same line even when it shouldn’t, and leaving things to “Daronomics,” as the pundits call it. Daronomics has not worked well, as the last economic survey shows, and the value of Rupee, inflation, government debt, credit ratings and money supply are all indicative of the failure. Yet the SBP, despite having a law that supposedly not just allows but encourages it to push back against precisely the ad hoc nature of Daronomics, is letting the economy get steamrolled without hue or cry.
Second, the SBPAA allows the SBP to enjoy greater functional independence, which is to say, choosing the monetary tools to achieve the goals that it determines to be most appropriate. Yet for all the talk of functional independence, the SBP has done only two things: raise rates and dabble in letters of credit (LCs). The raising rates to a monstrous 21% essentially suffocates economic activity, because there is no incentive to operate at such a high base rate when one can get a 21% return just for sitting on money. The LCs fiasco of the SBP has in essence turned it into an investment broker or export-merchant dealer, arbitrarily picking (or having picked for it) the winners and losers (and most are losers) in terms of who will be able to do business and who will not. This is a perverse role for a sober monetary authority to play, and it violates the spirit of any law written for a central bank anywhere, including the SBPAA. Therefore, the SBPAA has failed to get the functional independence for the SBP as well.
Third, the SBPAA argues for an inflation-only mandate, which is to say that the central bank should exclusively focus on inflation-targeting and nothing else. This notion came from the good old days wheen rich countries had near zero interest rates, and the world was awash in dollars. Those days are no longer there, and this makes the inflation-obsession a particularly horrifying stupidity of the foreign drafters of the SBPAA. Want to focus only on inflation? Fine. How’s inflation doing these days? Perhaps the worst in the history of Pakistan. So if we are to pick this new rubric by which to gauge the SBP, then based on the miserable inflation that the public is facing, the SBP has failed beyond measure. Of course, a monetary authority can and should do much more than focus on inflation, and that too by using more than just interest rates when inflation is supply-side in any case.
Fourth, the SBPAA aims to bring some Prudence to the fiscal side as well, by curtailing the SBP’s monetary disbursement to a government that continually lives beyond its means. The SBP has worked around this point entirely, by using the banks as the conduit for lending to the government instead. This means that the government continues its borrowing binge, instead of shrinking its size and rationalizing its expenditures, while the SBP continues to bankroll this unsustainable trajectory. It is simply that the banking sector has become the vehicle for this practice instead, totally violating the spirit put into the SBPAA.
Earlier this year, a group of industrialists made a memorable show in front of the Governor SBP when they motioned to hand him the symbolic keys to their industry, since under the conditions that the government (as a whole, and including the SBP) was creating in the economy, it was simply not possible to do any economic activity. The industrialists were throwing in the towel because they simply could not function under such poor circumstances, in which the SBP was not some mere observer but rather an active player.
The SBPAA was an alien document to begin with. But even if its good points were incorporated, we would be in a different economic landscape. Yet the high-minded things that the SBPAA asked for, including strong statutory and functional independence, no longer lending to the government, or an inflation-only mandate, all have fallen entirely short. This is not just something that the managers at the IMF need to think about, because their bogus ivory-tower prescriptions did not make a single improvement in monetary praxis here; but it is also something for the managers at the SBP to think about. What role do they want to play in the future of the country?
At CASS, we had raised the right questions, and explored various answers, well over a year ago. We can now see that the caution and alarm we raised, having fallen on deaf ears, is worsening our economic security and therefore our national security. As part of a sweeping change that is now required throughout the entire system, let us keep in mind a re-envisaged central bank role as a crucial component within the necessary transformation.
Dr. Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at email@example.com.