Making the SBP Autonomous

Giving autonomy to the Bank will not lead to bankruptcy.

The debate around the amendments being proposed to govern the State Bank of Pakistan has picked up momentum in the last few days. The first shot was fired by television anchor Malick, who hosted a show where he went so far as to say that the amendments were going to “create a state within a state.”

I got my hands on some of the draft language and had a back and forth with Malick sb. on Twitter, who promised to share the version of the draft he had — to date, I have not seen this version.

Then stepped in former Sindh Governor Mohammad Zubair, who argued that the amendments would make the SBP governor a “Viceroy” who would have absolute power to determine Pakistan’s economic policy.

During that same time, economist Dr. Bengali went on primetime television and argued that the amendments, as they were written, would push Pakistan towards bankruptcy where the government would not be able to pay salaries and even risk its defence budget!

Take a deep breath. There is nothing to be anxious about.

Let me first begin by using an example to argue why the SBP needs to be independent and autonomous, with a primary goal of pursuing price stability in Pakistan.

It is 2016 and the Pakistani economy is growing at a fast clip. Many economic analysts, including yours truly, start raising the red flag. We argue that this growth trajectory is unsustainable given the rapid uptick in imports, overvaluation of the currency, and the reliance on consumption to push the economy forward.

The architect of this policy was Ishaq Dar, which is why I call this period where Daronomics was practiced in Pakistan.

During this period, an independent central bank pursuing price stability would have looked at its own macroeconomic models and seen that the current path was unsustainable. It would have allowed the rupee to depreciate, raised raised to improve the balance of payments situation, and charted a path for a soft landing, where growth would be consolidated and tweaks made to ensure a quick recovery.

That, of course, did not happen.

In fact, even the PTI bungled its early response to the crisis in 2018. The result? Rampant inflation that eroded the purchasing power of millions of households, low growth that destroyed jobs, and economic pain that inflicted trauma on millions of Pakistani citizens.

An independent, autonomous State Bank, would have been able to prevent the economic catastrophe that Pakistanis experienced in 2018.

Which brings us to the amendments being proposed to improve the autonomy of the SBP.

I believe that the broad contours of the proposed amendments are on point and the government should be encouraged to make the SBP an autonomous and independent institution. Doing so would ensure that Pakistan moves towards sustainable growth where the genie of inflation does not destroy the purchasing power of millions of households every few years.

But that does not mean that the current amendments are perfect.

There is room for improvement and critics of the current amendments (note that the official version has not yet been released, so we are all working off the leaked Whatsapp versions) have some valid points.

Here are some:

  1. The SBP is not accountable to parliament: I 100% agree with this. Rather than the SBP informing parliament about what it is up to and how it is doing in terms of achieving its objectives, the SBP governor should come before parliament at least once a year to testify. But testifying means that those seeking the testimony are well-versed in the ABCDs of what is going on and don’t believe in cuckoo economics. Which means that parliament then needs to hire competent, well-qualified economists who can advise it on what is going on and where things can be improved. Only then can parliament act as the proper check against the SBP and grill the governor on what he or she is up to.

  2. SBP can no long provide export refinance, TERF, etc.: I missed this one, but our friend 2Paisay wrote a post which elaborated on this. This point is worth debating and the SBP must clarify here. Suffice to say, these facilities play an important role and we need to make sure that these facilities continue forward and tweaks are made where necessary to improve them further.

  3. The process is flawed: This is par for the course for the PTI in terms of how it proceeds with legislation. In my view, the draft should have been released to the public in its full form, following which the relevant government officials should have held a press conference to explain key points and why they were important, and answered any questions. That would have prevented us from all this brouhaha about Ottoman sultanates and state within state arguments, which in my opinion are distracting, to say the least.

  4. Monetary transmission mechanisms is weak and SBP can’t really control inflation: This is a very valid point and must be debated. I for one argue that qualified economists at the SBP will have their own macroeconomic models that can inform the Bank about why and how inflation is occurring in the country. So if there is high inflation due to rising costs, and the external sector is stable and the economy is not overheating, there is no need to raise rates (it will not make a difference). Which means that just because there is high inflation does not mean the Bank will raise rates. Its goal is to pursue price stability and it will have to clearly define its goals. In fact, the Bank already is giving forward guidance on rates, which is a positive change. And going back to Point #1, a parliament armed with its own team of economists can and must grill the SBP as and when needed on its models and assumptions. This happens the world over and should occur in Pakistan as well.

  5. Price stability means development will be ignored: This is simply not true. In fact, if you look at Pakistan’s recent economic trajectory, it is a lack of price stability (demand-pull and cost-push) that has eroded household purchasing power and inflicted trauma on millions of people. Without price stability, you cannot achieve economic growth. Additionally, if the argument that the Bank does not have a lot of tools to control inflation is true, it means that the government in fact have a lot of fiscal space to pursue development goals. No one, including the Bank, can stop the government from doing that so long as the spending does not cause inflation to rear up its head, either in the form of high aggregate demand (overheating economy) or exchange rate pressures (imported inflation). So the government is free to pursue its development goals, while the Bank can act as a check and balance and future proponents of Daronomics. Also, giving autonomy to the SBP does not mean that the finance ministry and SBP cannot exchange ideas and align on how best to pursue the goal of sustainable economic growth. In fact, with an autonomous SBP, the exchange of ideas and debate becomes even more robust, and I firmly believe that this type of healthy debate is good for economic development.

There is a lot more to be debated here and rational, ideas-based debate should occur. But so far, at least in the mainstream media, we have had a terrible debate on this topic, where people who know better are fear-mongering in a bid to place the government in a corner.

In fact, it is quite ironic that leftists like Dr. Bengali are using the language of right-wing radicals and calling this bill “anti-national.”

It is a disservice to the general public that educated, well-informed folks are peddling conspiracy theories about this bill. We can and must do better.

PS - read this article by Hasaan Khawar and this by Arshad Zaman to understand other perspectives on this.