THE State Bank is a central pillar of Pakistan’s economic management, and any reform of its constitutive law, especially if the reform is to touch on the core mission of the bank, must be carefully deliberated. At the moment, the State Bank Act endows the central bank with two core missions. First is to ensure price stability and second is to support growth. There is nothing inherently unusual in this since many central banks around the world do have a mission to safeguard growth in addition to price stability. The problem comes in when these two missions pull in opposite directions and the central bank leadership has to make a choice. Powerful political forces are unleashed in these times and the governor finds himself or herself in the centre of a policy storm which can get quite intense. In the past, for example, the State Bank under the leadership of Ishrat Husain leaned too far in the direction of a permissive monetary policy to support the growth process ushered in by the Musharraf regime, thereby laying the groundwork for an inflationary spiral that began in 2005 and engulfed the entire economy by 2008. Similarly, Shamshad Akhtar, his successor, found herself in the midst of a political storm when it became her job to put out the inflationary fire and safeguard the health of the financial system under the massive imbalances that had accumulated during the short-lived growth spurt that the Musharraf regime bequeathed to us.

Today, this history has gained new relevance because the State Bank Act is being amended under the ongoing IMF programme, and pressure from the Fund is to refocus the central bank’s attention purely on the mission of ensuring price stability. In an ideal world, this might sound like a good idea, since it has the virtue of ensuring that the monetary mistakes made in the Musharraf regime do not happen again. But at the same time, it is important to understand that the State Bank cannot be a stand-alone entity altogether, and whatever amendments are made in its constitutive legislation carry the assent of the political leadership in Islamabad, along with the opposition. The State Bank must, therefore, engage productively with the political leadership in helping draft these amendments, but it is the latter that will decide the limits of the possible in this case. In the meantime, the central bank clearly has a difficult balancing act to perform.

Published in Dawn, April 16th, 2020