Conditions missing for independent central bank: SBP conference
By Our Staff Reporter
KARACHI, Nov 14: The monetary policy cannot be formulated and implemented in isolation of government policies no matter how independent a central bank is, whether of an advanced or a developing country.
This was observed by State Bank Governor Dr Ishrat Husain while addressing an SBP conference on “monetary and exchange rate regime” here on Monday where speakers of international repute were also invited for debate on the subject.
Dr Husain said further that this aspect was of utmost importance for developing countries that still had a relatively weak taxation regime, with lingering suspicion of fiscal dominance hovering most of the time. In Pakistan, he says, the government does not have a broad revenue base and domestic financial markets do not have enough depth to absorb placements of public debt.
“Though the precondition of central bank independence is met for pursuing inflation targeting, the other conditions are missing,” he said.
The central bank chief said as the role of market forces was expanding owing to liberalization, deregulation and privatization of the financial sector, there were changes taking place in the transmission mechanism of monetary policy also.
“The redefinition of the regulatory role of the SBP, the revision of prudential norms, the revamping of bank supervisory tools, the shift towards automation and electronic banking and financial innovations in products and services are contributing towards the emergence of a different financial system,” he observed.
Discussing the exchange rate regime in Pakistan, Dr Husain said the current framework of monetary-cum-exchange rate policies and underlying economic analysis in Pakistan could be broadly characterized on judgement and discretion rather than model or rule based.
He pointed out that the managed float had severed Pakistan quite well as it had conferred a degree of certainty and predictability to the exchange rate. He said the accumulation of reserves during the last four years had underscored the credibility of the exchange rate policy and minimized excessive speculative activity.
The SBP governor said the main justification of current practice was that the economy was undergoing a fundamental structural transformation and thus the behaviour was in a state of flux and transition.
“A model or rule based framework may be inadequate at present to guide the SBP in meeting unanticipated exogenous shocks and managing unforeseen crisis or crisis like situations, as our understanding of the empirical links between instruments and targets of monetary policy is incomplete or rudimentary,” said Dr Husain.
He said the recent episodes of financial crisis in the 1990s occurred in countries where inflation was low, fiscal deficits were small or even absent and the public debt burden was at tolerable levels.
Models based on the past data missed these episodes as they would have emanated danger signals that only if the countries had high current account deficit, unsustainable external debt burden and serious fiscal imbalance or combination of these, could survive.
In hindsight, a better way to detect signs of a danger would have been to complement sound monetary and fiscal policies with flexible exchange rate, better regulations and supervision of the financial sector, greater disclosure, transparency and communication.
He said it had already been envisaged in the five-year strategic plan of the SBP that the current internal monetary and exchange rate policy committee would be transformed into a conventional monetary policy committee, with decision-making powers about altering the monetary policy stance in a transparent manner in future.
“I hope that the present conference will provide a stimulating intellectual impetus to SBP research and policy staff to chart out alternative courses of monetary strategies for the future,” he said.
