In 2021, the State Bank of Pakistan (SBP) is expected to focus on financial inclusion — and more exclusively on general equality in financial inclusion plus payments system. In addition to deepening digital payments, the central bank may also have to make its position clearer on crypto currencies.

Banks and other financial institutions will see more regulatory requirements in each of these areas and have to ensure compliance. The central bank is also expected to become more proactive in promoting green banking.

But whether the central bank gains the desired autonomy depends on whether the government — particularly the powerful establishment — will let this happen or find a way out for delaying the process.

In 2020, the SBP fully exercised its newfound liberty in maintaining market-based exchange rates. The fiscal and monetary authorities worked in close collaboration for Covid-19–necessitated interest rate relief. The market-based exchange rate–setting is sure to continue through the next year — and the interest rate–setting, too, will remain the central bank’s monetary policy committee’s domain with justifiable inputs from the government.

In 2020, the SBP’s drive for foreign exchange reserves–building remained rooted as much in its own policy of improving the cover for external payments as in the “national strategic need” arising out of the volatile geopolitical situation. In 2021, this reserves building is expected to continue.

And, that means that in 2021 the SBP and the government will continue to make joint efforts to make the most of the rescheduling of the external debt, contain the fresh rise in external debt and liabilities and achieve high and sustainable growth in non–debt creating foreign exchange inflows through exports, remittances and foreign investment.

In 2020, the SBP ensured that the government stuck to the policy of making no fresh borrowing from the central bank. This policy — introduced by the SBP on the insistence of the International Monetary Fund (IMF) — cannot be reversed in 2021 as the government, too, owns it for obvious economic reasons. Borrowing by the government from commercial banks remained huge in 2020 as it kept retiring previously obtained loans from the SBP and fixed fiscal holes in the national budget. In 2021, the size of government borrowing from commercial banks can reduce if its efforts to increase non-bank borrowing from the revamped national savings regime succeed, the tax base is expanded and tax revenue grows substantially.

In 2020, negative 0.4pc growth in the economy reduced the demand for private-sector bank credit. But banks failed to meet even that reduced demand as government borrowing crowded out the private sector. In 2021, the SBP will have to make sure that private-sector credit demand is met fully. Disbursement of the post-pandemic concessional loans approved in 2020 can help boost net private-sector credit in 2021.

A vigorous campaign launched by the government to promote the housing sector can also help boost the overall off-take of private-sector loans. In 2020, banks’ mortgage financing contracted due to negative growth in GDP and the Covid-19–triggered lockdowns. The SBP is now assigning mandatory mortgage loan targets to banks. This target setting along with the creation of the Naya Pakistan Housing and Development Authority to implement Prime Minister Imran Khan’s promise of building 5m new housing units is expected to revive housing loan demand in 2021.

If all goes well, the central bank is expected to convince the government in 2021 to remove legal constraints in its way to make inflation the anchor of its monetary policy instead of pursuing the twin targets of managing price stability and economic growth. Fiscal and monetary authorities are currently working on it and the item is on the IMF’s central bank reform agenda. The introduction of a single treasury account and the ban on fresh government borrowing from the central bank will help achieve the fiscal discipline needed before the SBP stops chasing economic development as one of the primary objectives of its monetary policy — and focus instead on price stability, stability in the financial system and market-based exchange and interest rate management.

Even after getting out of the grey list of the Financial Action Task Force (FATF), which seems quite a possibility in 2021, Pakistan as a state will have to ensure that its financial system becomes and remains immune to all attempts of money laundering and terror financing. —MA

Published in Dawn, The Business and Finance Weekly, January 4th, 2021