REMAINING within the existing monetary policy framework, the State Bank of Pakistan (SBP) has taken some temporary measures to stimulate the economy. The latest one is the launching of a 3-month ‘Refinancing Scheme for Payment of Wages and Salaries’ which will enable businesses to get cheap loans with easy re-payment facilities to avoid layoffs. The scheme will cover all types of employees including contractual wage workers as well as outsourced workers in small- and medium-sized enterprises.

Another notable feature of the scheme is the two different lending rates: 4 per cent for borrowers on the active tax payments list and 5pc for the other category of businesses. Earlier, among other measures, the central bank had reduced interest rate for industrial investment to 7pc.

The scheme is seen by trade bodies as something encouraging but for suggestions such as the cut in interest rates and interest-free loans. The big businesses also want to be included in the scheme. Nonetheless, the small subsidiaries/sister firms run by big business groups may qualify for this scheme.

In a way, the State Bank is sharing the burden of the cash-strapped government in overcoming the adverse impact of Covid-19 through tax cuts and enhanced public spending to provide relief to firms and households. Selectively, the tight monetary policy is being temporarily and more widely relaxed as the current low falling economic growth carries the risk of recession.

Governance is getting more and more complicated and the solution lies in the wider dispersal of rights and responsibilities with a sound system of coordination and accountability

Pakistan faces a sharp economic recession along with a skyrocketing fiscal deficit while its external sector is coming under serious stress, says the latest World Bank report titled ‘South Asia Economic Focus.’ The International Monetary Fund estimates the country’s economic growth at negative 1.5pc this fiscal year. And economist Sakib Shirani points out: “we should be worried more about deflation than inflation in the months ahead.” In the US, some leading economists have even called for an end to inflation targeting by central banks.

The record shows that central banks in countries such as China, India and Brazil, considered less independent by western standards, performed better than more independent central banks in Europe and the United States in times of crisis. The objective of monetary policy in China is to maintain the stability of the currency and thereby promote economic growth.

The World Bank report on South Asia says the duration of the crisis and the capacity of government interventions to protect investments in the physical and human capital of the most vulnerable segments of the population will be important to prevent long-lasting consequences. Certain development economists have called for a review of the central bank’s policies for pulling sinking economies out of the quagmire.

Gerard Epstein, author of the book Political Economy of Central Banking: Contested Control and the Power of Finance argues that central banks should return to the policy norm wherein goals such as employment creation and sustained economic growth are blended with the goals of price and financial market stability.

Some economists see the risk of a new global Great Depression that may turn out to be worse than the original depression witnessed in the first half of the last century. They say such a possibility is growing by the day as the prospects of an early recovery from the current ‘economic tsunami’ appear uncertain. Some view the emerging scenario similar to that of the post-World War II period which served as a catalyst for great global economic and political transformation.

The need for widening the mandate to fight the recession and for workable autonomy for the central bank cannot be over-stressed. According to finance ministry sources, the SBP draft proposals seek: abolition of the finance minister-led Monetary and Fiscal Policies Coordination Board; an end to the role of the federal government in quasi-fiscal operation; removal of secretary finance from the central SBP Board; and a 5-five year secured term for the SBP governor, renewable for another 5-year term.

Taking the last point first, in the last decade or so, most SBP governors were unable to complete their existing 3-year fixed tenure. During this period Dr Ishrat Husain was an exception who served two 3-year terms and retired on December 1, 2005. Of the six governors appointed after him, but for only two — Dr Shamshad Akhtar and Ashraf Mahmood Wathra — the rest had to quit before the expiry of their fixed tenure. Even the immediate predecessor of the incumbent was asked to resign. In countries where the rule of law is limited, de-jure and de-facto autonomy diverge. This also happens because individual autonomy is confused with institutional autonomy.

If Monetary and Fiscal Policies Coordination Board is disbanded what better alternative is there for interaction between the central bank and finance ministry for evolving coordinated fiscal and monetary policies. All autonomous institutions have to work with their respective relevant arms of the government to help evolve, through intensive mutual consultations, centralised policy guidelines which should be finally approved by the parliament. Critics say public institutions cannot be independent as they are accountable and the only question is to whom.

The finance ministry plays a pivotal role in economic policy-making and has almost pervasive control over the nation’s purse. That affects the efficiency and performance of such institutions as the Planning Commission of Pakistan and other government departments/ministries. Now they want the procedures for approval by finance division for the release of funds for every development project to go. Instead, they want to make their own decisions on the utilisation of the allocated funds earmarked in the annual budget for development and non-development expenditure.

Governance is getting more and more complicated and the solution lies in the wider dispersal of rights and responsibilities with a sound system of coordination and accountability.

Published in Dawn, The Business and Finance Weekly, April 20th, 2020