Navigating SBP’s independence

THE debate surrounding the State Bank’s independence is again picking up pace after some shocking claims made by the federal minister for privatisation, blaming the International Monetary Fund for direct intrusion in the country’s central banking system.
It all started back in January of 2022, when the parliament passed the State Bank of Pakistan (SBP) Amendment Bill, 2021. This legislation created an immense uproar as it addressed a greater power tussle between the State Bank and the federal government. It is imperative that parliament should not succumb to external pressures; rather it must strike a balance between the autonomy of the State Bank and the prerogative of the federal government.
One of the most significant functions of the SBP is to control monetary policy. Simply put, monetary policy involves regulating interest rates, managing money supply, monitoring bank reserve requirements, overseeing exchange rates and promoting overall economic growth.
Monetary policy requires continuity; it cannot be left to the cruel volatilities of Pakistani politics. As such, the SBP Act mandates a five-year term for the board. This ensures that the board can independently guide policy for a fixed tenure, regardless of the political situation in the country.
One of the key roles of the State Bank is to formulate and maintain an exchange rate policy. Ideally, the exchange rate should be determined by the demand and supply of a currency within the market. However, populist governments often peg the exchange rate in favour of short-term relief; this consistently depletes limited foreign exchange reserves to prop up the value of our currency artificially.An autonomous State Bank can protect the currency from such political ambitions.
Traditionally, central banks, like the SBP, are envisaged as a ‘lender of last resort’ — both to the government and to commercial banks. This creates the perception that the SBP will fund the government’s schemes without due diligence and bail it out in difficult situations.
The recent amendments attempt to rectify this. For example, the Act forbids the SBP from providing a direct credit facility to the government or any of its subsidiaries. Similarly, the State Bank could be used to fund political objectives aimed at providing instant relief to the detriment of long-term economic growth.
To counter this, the Act delineates the aims of the SBP. Now, the primary aim of the State Bank is to ensure price stability. It does recognise other aims, such as overall development and economic growth, however, when there is a conflict between these goals, the former will prevail.
However, the government should not be completely ostracised from State Bank concerns. Granted, the SBP should have autonomy to dispassionately decide its policy matters; however, it cannot operate in a bubble. The repercussions of its decisions creep far into the political and geo-strategic realm.
The federal government is responsible for these issues and should have a material voice in matters affecting them. The Constitution also supports this assertion: article 97 posits that the federal government’s authority directly extends to the State Bank. Therefore, the government should have a role in the operational intricacies of the Bank, such as monetary policy and exchange rate matters.
Moreover, an assumption of mala fide intent cannot always be attached to the decisions of the government. Not all policy decisions are based on political motivations that run contrary to state interests, such as targeted subsidies to give relief to the public.
At the end of the day, the government is formed of elected representatives of the people and should be accorded the leverage to decide policy matters in good faith. For instance, one imperative of the government is the promotion of an equitable socio-economic polity; this, however, can often run at odds with sound economics. It is, then, up to the government to strike a balance between these two competing goals.
To conclude, the economic imperatives of the state can only be fulfilled if there is a balance of power between an autonomous State Bank with an accountability mechanism and the federal government’s prerogative.
The writers are law students at the Lahore University of Management Sciences
Published in Dawn, The Business and Finance Weekly, December 4th, 2023