Successive governments have been averse to legally empowering the State Bank of Pakistan (SBP) to operate with complete autonomy, considering it an external agenda demanded repeatedly by the International Monetary Fund (IMF) under their bailout programmes.
Governments and major opposition parties have been in agreement that allowing ‘states within the state’ was not in their interest. This is in spite of their repeated commitments to strengthen the autonomy of the SBP in pursuit of price stability and enhanced governance structure, including strong internal controls.
Many improvements took place over the years, but the key objective of price stability and monetary policy control still remains outside the ‘exclusive domain’ of the central bank that has usually followed a cooperative approach towards the Ministry of Finance.
Globally, the goal of a central bank is to uplift the nation’s standard of living through the appropriate conduct of monetary policy. This goal is achieved by conducting monetary policy in a way that ensures a low and stable inflation over time, a phenomenon commonly known as ‘price stability’.
The fundamental argument is that low and stable inflation is good as it does not hurt the poor segments of society disproportionately and paves the way for a sustainable real economic growth.
It was this logic, which convinced governments and central banks across the globe back in the 1980s and ’90s that the primary and overriding objective of a central bank should be ‘price stability’. It should have full independence for its achievement and be accountable for its non-achievement.
Sufficient empirical evidence suggests the SBP created excessive inflation and distortions in the economy that hindered economic growth in the last half a century
Accordingly, most governments and central banks transformed and devised statutes to cater for the desired institutional change and provide for selection and deployment of top-notch economists.
Under such a monetary policy framework, central bank governors are given price stability consistent inflation targets — say two per cent inflation with a range of plus or minus 1pc — which they are legally bound to consistently achieve each year. In case such targets are missed due to policy neglect, the central bank governor is liable to be shamed or is fired from the job depending on the nature and the degree of neglect or deviation from the target. The severity of this strictness is motivated by the fact that the interest of the entire country is deemed far above the job of one individual or their team per se.
For decades, this system worked so well for a majority of advanced as well as a range of developing and emerging countries. The system has made the life of everyone easier, whether an ordinary common man (poor or otherwise), savers, investors, exporters, importers or the government itself. Everyone is certain what inflation is likely to be in the short and long terms.
All of them, therefore, feel at ease to plan and take wise economic decisions. It is this small tweak in a direction that helped many countries and their people to enjoy a happy life since they executed the transformation of their central banks in letter and spirit.
By now, there is wide empirical evidence that the countries that transformed and tuned their central banks in the right direction achieved low and stable inflation while ensuring stability in real economic growth, exchange and interest rates and the financial sector.
The Pakistani nation has not been so fortunate to avail the benefits of monetary policy. But it paid a heavy toll for the incompetence of its decision-makers, especially leading members of successive governments and their ministers at Q-Block.
Unlike the global practice of having top-notch economists with expertise in monetary policy and price stability as central bank leaders, a majority of SBP governors over the decades were bankers, accountants and bureaucrats. No wonder that robust empirical evidence suggests the SBP created excessive inflation and growth distortions in the economy in the last half a century. It significantly hindered economic growth and will likely keep harming unless the house is put in order.
The SBP has yet to understand and also pass on this idea to the government that the pursuit of the dual objectives — growth and inflation — as required by the statutes and as practiced by the SBP is no less than blasphemy when it comes the conduct of monetary policy.
They should educate themselves and the finance ministers that the way to sustainable growth is through price stability. It indeed requires a clear statutory commitment by the SBP and a clearly spelled-out mechanism for accountability to be able to stabilise inflation to benefit this poor and indebted nation of more than 207 million people.
Published in Dawn, The Business and Finance Weekly, January 21st, 2019