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Exchange rate blues

December 09, 2018

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IT was never going to be an easy promise to live up to, but since the government has committed itself to ensuring the independence of the central bank, it must now learn to not only accept the consequences of the decisions made by the regulator, but also to listen to critical feedback from it. The State Bank performs many functions besides curating the exchange rate. It decides monetary policy and provides regular synoptic 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.

In fact, there are numerous instances where the State Bank’s responsibilities have had direct political consequences. 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 that large swathes of the financial sector do not descend into racketeering. Yet, this independence has always been contested. Past governments decided they could not live with an independent bank making exchange rate and interest rate decisions on its own, and sought to limit this autonomy by placing pliant individuals from among their own circle of associates in the position of governor. The PTI was right to say it would end this practice, but having made that commitment, now finds itself dealing with the consequences. The recent exchange rate depreciation and interest rate hike have riled the business community and some powerful quarters within the ruling party as well. The prime minister himself has gone on record to ask for a “mechanism” to make exchange rate decisions “so we can provide our input”. This is a step backward from his commitment to strengthen institutions. The finance minister must help his party colleagues understand this.

Published in Dawn, December 9th, 2018