Central bank independence

The PTI government has said that the State Bank of Pakistan would operate independently of the wishes of the federal government. However, it seems the government has decided to let politics play a role in determining monetary policy once again, with reports in that the government wants the State Bank to consult with the centre regarding the exchange rate. The trouble is that the PTI government has been coming up with declarations of economic policy from neoliberal economics textbooks without understanding the political nature of fiscal decision-making. When the SBP decided - ostensibly independently - to devalue the exchange rate, it coincided with the PTI's 100 days of miracle work celebrations. The falling exchange rate coincided with a sharp fall in the stock markets, leaving the govt looking like it was completely clueless about the economy.

Now, there are two issues with the PTI's original declaration regarding the 'complete autonomy' of the SBP. First, that economic decisions are inherently political. Second, that the SBP's decisions on the exchange rate and monetary policy had no small part to do with the IMF's proposals to Pakistan on 'what is to be done' with the economy. Succumbing to international pressure does not equal an 'autonomous' monetary policy..

The SBP should be asked to work out a mechanism to 'consult' the government on the exchange rate. Consultation translates into obeying the federal government, and this is exactly repeating one of the 'economic sins' that the PTI accuses the PML-N government of doing.

It is not easy to live up to the promises, but since the government has committed to ensure the independence of the central bank, it must accept the consequences of the decisions made by the regulator and also listen to critical feedback from it. The State Bank performs many functions besides curating the exchange rate. It decides monetary policy and provides regular snapshots of the state of the economy through its monetary policy statements, as well as its quarterly and annual reports. It also performs a supervisory function for all commercial banks to ensure that systemic risks are kept at bay. The discharge of these functions automatically brings the State Bank into contact with political authorities - for example, in the event of the State Bank's assessment of the economy differing in important ways from the government's, or if a politically connected individual is denied a banking licence, or if requests for borrowing from the State Bank are not entertained as expeditiously as the politicians would like them to be.

It is for this reason that the law calls for an independent central bank so it can carry on its business without fear of a political backlash. This independence is vital to the normal functioning of our financial system, and it is required to ensure financial sector do not descend into fraud. Yet, this independence has always been contested. In fact PM statement to ask for a "mechanism" to make exchange rate decisions is a step backward from his commitment to strengthen institutions. The government must realize the importance of the central bank independence and ensure SBP's independence is protected at all cost.