Despite the restructuring of the State Bank of Pakistan (SBP) over a decade ago, its autonomy question remains unresolved. During the PPP government, two governors resigned due to differences with the then executive. Salim Raza and Shahid Kardar both had to quietly resign rather than resist the temptation of the political executive to spend beyond the monetary policy parameters. The third governor, who recently resigned due to personal reasons, continues the trend.
There is a strong argument that elected governments have to deliver on their promises of patronage, given how the political system works. However, without generating sufficient revenues and reforming the taxation system, the expenditures emanate from reckless deficit financing, i.e., printing of notes. This is why Pakistan has witnessed some extraordinary bouts of inflation. Price levels have been rising since the present government took over and only recently they have stabilised. Whatever the finance minister may have said (e.g., hoarding causes price hikes), it is well known that fiscal improvidence and monetary expansion are contributing to inflation. One way to tackle this trend is to enhance the policy rate but this impacts the credit needs of the private sector.
Borrowing nearly Rs2 billion a day from the SBP cannot be a prudent or sustainable option. Of course, in the short term, raising revenues may not be possible but the government has to set limits. This is what the SBP has been prescribing. Pakistan’s recourse to the IMF in recent years has resulted in a situation where nearly 25 per cent of the annual budget is reserved for IMF debt repayments.
The erosion in the value of the rupee has further increased the value of foreign debt close to Rs500 billion. Each time the government intends to tighten the monetary policy, it increases its domestic debt burden as it happens to be one of the biggest borrowers from the central bank. There is no option but to pursue a tighter fiscal policy with a controlled monetary expansion. Therefore, a robust and an autonomous SBP is vital for economic management.
The departure of the SBP governor is not a good sign. There seems to be a regulatory void in the country as the key appointments in various regulatory authorities are vacant. Few are disputed in courts and the ‘loyalty’ test is being applied on potential candidates. It would be a travesty if the SBP is treated as just another government office, for it simply is not.
The SBP’s primary role is to issue notes, act as a regulator of the financial system, as the bankers’ bank and as banker to the government, as well as setting the monetary policy. It is also a key actor in managing public debt, foreign exchange and acts as policy adviser to the government on its economic relationships, especially that with international financial institutions. By no means is it a commercial bank as many — including those in the political elite — view it to be. The Musharraf government imported a good commercial banker as the finance minister. This betrays a limited understanding of the way economic policymaking works and why it is important to have professional and experienced economists who can think beyond the imperatives of balancing the books and marketing brands of their ‘success’. The Musharraf bubble burst even before it could be branded and today, many of our economic woes are directly linked to what happened during the period 1999-2007.
Dr Ishrat Husain, as a competent manager of the central bank, turned it around and its internal restructuring remains one of our recent success stories. By attracting good professionals and encouraging many to pursue higher education, the SBP has a good team available. This is why its next governor needs to be an economist, and not a financial wizard, to lead the institution and furnish pertinent advice on macroeconomic policy to the government. The SBP is not an attached wing of the finance ministry nor is it a platform to reward a loyalist. Its governor has to provide independent advice, as well as regulate the financial system’s operations. It is hoped that the government would resist the temptation to treat it as just another appointment.
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