Struggle for monetary sovereignty

Published January 17, 2022
This file photo show the State Bank of Pakistan. — Photo courtesy: ProPakistani
This file photo show the State Bank of Pakistan. — Photo courtesy: ProPakistani

State sovereignty can be reinforced by creating a wide network of autonomous bodies enjoying operational freedom under the policy guidelines evolved through close interaction and coordination. That could help ward off undesirable external influences.

Under the State Bank bill, Finance Minister Shaukat Tarin says, the government would determine the inflation and growth targets and the State Bank of Pakistan (SBP) will have administrative autonomy. Inflation and growth objectives are in the preamble of the bill, says State Bank Governor Reza Baqir. Apparently, this should have implications for the SBP interest rate policy set by the inflation rate and the exchange rate outlook.

The central bank, Mr Tarin says, would not have powers to take decisions unilaterally and would be supervised by a board of governors appointed by the government, and work under the oversight of the parliament. The parliament and its standing committees can call the SBP governor when required, as recommended by the opposition and incorporated in the bill by the National Assembly Standing Committee on Finance.

The actual level of the central bank autonomy will likely be determined more by the prevailing economic and political developments, public pressure and movers and shakers of the economy and less by the amended SBP act

The bill also proposes that the SBP shall be consulted prior to the introduction of any bill in the parliament which may have a bearing on the functions of the central bank. To avoid arbitrary decisions, it is in the fitness of things to have prior consultations with relevant institutions working in a specific/specialised field of economic and financial activity After all a lot of input have been provided, rather initiated, by governor Baqir in the current SBP bill though these were based on the controversial International Monetary Fund (IMF) conditions.

Still, there have been prolonged and intensive discussions on SBP autonomy issues with the finance ministry interacting with both the central bank and the Fund. The bill incorporates some major Fund conditions.

Though “monetary and fiscal policies are intricately linked,” critics say, the Monetary and Fiscal Policy Coordinating Committee is to be abolished. Instead, a new section requires that the SBP governor and finance minister establish a liaison under a mutual agreement. The opposition in the parliament questioned how the coordination will be possible between two persons in absence of a legal body. PPP leader Syed Qamar Naveed pointed out that inflation cannot be controlled through monetary policy alone as there are fiscal and administrative aspects that relate to the federal government.

A monetary expert says the rationale of any policy or decision should be first examined thoroughly before trying to bring about a change.

The bill envisages that the central bank shall not extend any direct credit to or guarantee any obligation of the government or any government-owned entity or any other public utility. While the issue of financial discipline cannot be overemphasised this ban under IMF persuasion has not helped so far to restrict government borrowings. The domestic and foreign borrowings had hit a historic high of Rs40.9 trillion by the end of November 2021.

Mr Tarin says tax–to-GDP ratio is in the range of 9-10 per cent and government expenditure adds up to 12-13pc. “We have to take loans for the payment of our current expenditure and finance development initiative; this cannot work.”

It appears that Rs343 billion taxation is meant for servicing the markup and the principal (debt) amounts due and reducing budget deficits, say President of Pakistan Chambers of Commerce Nasser Hyatt Magoo. “For every rupee devaluation, additional demand of Rs100bn is generated for servicing the markups and returning the loans as they are due or would be due.”

Prime Minister Imran Khan fears that his government may have to go to the IMF again if the country’s exports did not increase sharply. Governor Baqir is however confident that the country has the capacity and financial cushion to ride out the rising external account pressures, which he says, is being driven by a surge in global commodity prices. In his view, the flexible exchange rate will help ensure the sustainability of the balance of payments.

The actual level of the central bank autonomy will likely be determined more by the prevailing economic and political developments, public pressure and movers and shakers of the economy and less by the amended SBP act. In Mr Tarin’s view, the act can be amended by a simple majority in the parliament if things do not work out well.

One can witness a rare informal consensus cutting across the national divide in the debate on Pakistan’s failure to develop a homegrown macro-economic policy that determines the country’s economic sovereignty needed to resolve its deep-seated structural problems.

The debate has been triggered by the mini-budget and SBP autonomy bill with people representing diverse interests and views rallying to defend the real and perceived loss of economic sovereignty. They include businessmen, leading financial analysts, independent scholars, economists, think tanks, dissenters among the ranks of the ruling party and its allies, their rival opposition parties in the parliament and outside. Even the prime minister’s office has reportedly expressed its reservation on certain provisions of the SBP bill.

That has finally led to the PTI government’s requesting the IMF to postpone for three weeks the January 12 Fund’s Executive Board meeting to approve a $1bn loan, subject to the approval of two bills by the parliament. It is certain ground realities that induced the PTI government to renegotiate the IMF deal reached by former finance minister Dr Hafeez Sheikh.

A new research division — Foreign Aid Effectiveness Unit — has been initiated by the Pakistan Institute of Development Economics (PIDE). Research Fellow at PIDE Abbas Moosavi stipulates that it will revaluate Pakistan’s relationship with donors, serving to facilitate more context-specific approaches that are geared around long-term structural reform over opportunistic interventions. ‘Apolitical aid is a myth,’ he wrote, in his recent article headlined “Extraction, thy name is development.’

“Without a coordinated and sovereign control over the money supply and fiscal control,” to quote an eminent analyst, “we will never be able to recover an ailing economy.”

Published in Dawn, The Business and Finance Weekly, January 17th, 2022



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