THE advent of large navies in warfare forced British monarchs to levy heavy taxes. Such arbitrary taxation led to persistent economic uncertainty that stalled economic growth. All this changed after the ‘Glorious Revolution’ of 1688-89, when Dutch invaders established economic institutions like property rights in England. Facing a stronger parliament, monarchs were now no longer free to take away the hard-earned gains of private citizens as courts started enforcing property rights. As a result, economic uncertainty vanished, economic activity thrived and England became first Great Britain and then the British Empire.
The same logic underpins arguments in favour of central bank independence. An elected official would feel the urge to use a central bank’s monetary levers to stimulate the economy, especially before elections. This politically motivated money injection by the central bank would thus leave economies stuck in a permanent inflationary cycle. Inflation is akin to levying a tax as it reduces buying power. It is argued that only a formally independent central bank, free from political influence, can ensure the fiscal discipline necessary for maintaining price stability or low inflation. In a way, proponents of central bank independence want to depoliticise monetary policy and operations so that appointed officials can make consistent policies for optimal economic outcomes.
The preceding ideas are also behind the government’s efforts to make the State Bank of Pakistan (SBP) formally independent by enacting the proposed State Bank of Pakistan (Amendment) Bill, 2021. The government’s spokesperson has shared the bill’s objectives regarding controlling inflation and political meddling in the bank with the media. According to reports, the bill has already passed muster in the cabinet. Apparently, once the bill becomes law, the bank will not be under any compulsion to support the government’s economic policies. As such, the new bill seeks to formally empower SBP so that it will only focus on price stability.
Where the bank’s independence can arguably assist with price stability and low inflation, the initiative appears to be in line with IMF’s austerity and fiscal consolidation agenda that the Fund imposes on borrower nations. The biggest concern that arises out of the IMF-supported autonomous SBP initiative is that though it seeks to end political influence, this initiative will reshape the country’s economy in ways that would appear to be political:
First, SBP’s intention to not support the government’s economic policies will invariably slow down post-Covid-19 economic recovery, thereby negatively impacting the most vulnerable segments of society. Ultimately, who bears the brunt of economic policies is a decision that needs to be taken by the political leadership and not by technocrats.
Second, SBP’s plan to only focus on maintaining price stability when the lack of employment is a social crisis in this country has serious political implications.
Third, IMF-SBP forcing austerity and fiscal consolidation on the Pakistani government, in a time of crisis no less, will also impede the government’s ability to pay for public services like health, education and clean drinking water now and in the future. Any ensuing social unrest would become a serious political challenge.
Finally, and perhaps somewhat alarmingly, the autonomous SBP bill all but does away with accountability for the central bank as the SBP leadership would not be answerable to even the prime minister. Such a blank cheque on autonomy will invariably create a situation where the SBP and the Pakistani government will end up working at cross purposes.
It appears that the IMF through the autonomous SBP is trying to fashion the Pakistani economy in its own image. The reality is that at least since Covid-19, the world has been moving in the opposite direction of IMF’s austerity and fiscal consolidation agenda. However, where the IMF is asking rich nations to worry less about their debt and boost public investment, the Fund’s focus has barely shifted from austerity and fiscal consolidation for emerging economies like Pakistan.
In the final analysis, when it comes to reforms there is a lot of scope for them in Pakistan, especially in making the Federal Board of Revenue and the Planning Commission more agile and modern. Some IMF proposals like privatisation of state-owned enterprises should be prioritised by all means. Policy independence for the SBP is a good thing since fiscal discipline is perhaps the need of the hour. The price for these reforms, however, should not be extracted from the most vulnerable segments of society in the guise of depoliticisation. The time has come for introspection at the IMF to bring its reforms agenda in line with the ground realities of emerging economies.
The writer completed his doctorate on a Fulbright scholarship. He teaches economics and public policy at Habib University, Karachi.
Published in Dawn, March 22nd, 2021