Let the State Bank do its job

Instead of ordering about the State Bank, parties should bring in new legislation for investigation.

Just when one thought that the State Bank of Pakistan (SBP) was, at long last, moving towards the autonomy that it must enjoy as the guardian of public money, the external value of currency and, most importantly, the conduct of monetary policy, there have been developments which will not only deflect the SBP’s attention from the critical objective of saving the economy from the spectre of hyperinflation, but also undermine its confidence in facing up to extraneous pressures. One is not talking here about the delay in the parliamentary approval of the bill to amend the SBP Act, which would have empowered it to work independently in a government, where the printing of money is seen as a solution to meeting rising government spending. Nor is one resorting to the constant refrain about IMF conditions. The sand in the ointment, this time round, is the judiciary’s obsession with fixing the economy and the consensual outcome of the talks between the government and the main opposition party on the so-called 10-point agenda.

The Supreme Court of Pakistan, for which I have the highest regard, is unhappy with the governor for what has been seen as non-cooperative behaviour with regards to the ongoing hearings on loan write-offs. His lordship, the chief justice, was right in observing that banks hold public money in trust. A breach of this trust would occur if depositors failed to access their money or were denied the promised return. In this case, the aggrieved could seek redress from the courts. However, there is no example of this happening even in the case of banks indulging in massive write-offs. Loans are written off by the respective managements of the banks, not by the State Bank. This is done mostly for commercial reasons and to clear up balance sheets. Political write-offs have also taken place since the days of Mard-i-Momin Ziaul Haq, but these have largely been in public sector banks with obliging political appointees as heads. Again, the State Bank had no way of stopping these write-offs at that time. With these banks privatised, the determination of the political nature of a loan is no longer a straightforward business. The SBP can provide data on written-off loans, which it has done, but it has no expertise to determine whether or not a particular loan was written off for political reasons. It is stated, with all humility, that the SBP be left alone to do what it is supposed to do in a free-market developing economy. It is among the few well-governed institutions left in the country. It has put in place systems and procedures to deal with non-performing loans, which should be allowed the chance to work their way through.

Another ominous development is that the government party and the main opposition party have joined hands to, according to some reports, ‘order’ or ‘direct’ the central bank to recover loans given on political grounds. It has been given three weeks time to determine which of the written-off loans were given on such a basis and which were not. While saner counsel has prevailed not to start the process from 1947 or 1971, dealing with 1,300 defaulters of 16 financial institutions can overstretch the energies of the State Bank for a task it is not designed to carry out. Instead of ordering about the State Bank and lowering its morale, the two parties should bring in new legislation for investigation by a special-purpose body. Let the State Bank do what it is designed for.

Tailpiece: Nadeemul Haque called to say that I had misspelled his name in my last column. The error of omission is regretted.

Published in The Express Tribune, February 18^th, 2011.