Inaugurated in 1948 by the Quaid-e-Azam as a symbol of the “sovereignty of our state in the financial sphere,” the State Bank of Pakistan (SBP) is now 70 years old. It was born autonomous under the SBP Order 1948, well before the Government of Pakistan had time to establish itself administratively as well as professionally. Until it became an Act in 1956, commercial banks were also quite independent of the SBP. Deposits grew more than private sector demand for credit, with minimal resort to SBP reserves. The first dose of heavy bank borrowing happened in 1955-57. Following the coup in 1958, Field Marshal Ayub Khan pushed economic growth as its legitimiser. As liberal economic policies spurred private industrial sector dynamism, demand for credit soared. Banks had to look towards the SBP for reserves, thus creating the necessary condition for the operation of monetary policy. The government encouraged the SBP, without much success, to direct credit to neglected sectors, persons and areas in the light of the Credit Enquiry Commission of 1959. It also strengthened the SBP by promulgating the Banking Companies Ordinance, 1962. No formal attempt was made to influence the State Bank in the conduct of monetary policy. At the annual meetings, despite 51 per cent representation of the government, governors presented an independent view of the state of the economy. In early 1970s, effective management of two demonetisations inspired public confidence in the SBP.
Concentration of credit and inter-locking directorships of financial and industrial houses were among the major criticisms against the Ayubian “decade of development”. Prime Minister Zulfikar Ali Bhutto’s government gave extensive powers to the SBP under the Banking Reforms of 1972 to satisfy the demands of social justice. A National Credit Consultative Committee was set up to allocate credit within a planned framework. Not considered enough, all banks, including the SBP, were nationalised on January 1, 1974. The practice of an annual address by the governor was discontinued. The Pakistan Banking Council was created with functions overlapping with the SBP. General Zia’s regime introduced Islamic financing in 1980. The regime misused the SBP’s extensive powers to eventually leave a legacy of massive loan write-offs.
With the return of democracy came the financial sector reform in 1989 during the first Benazir government. Deregulation, liberalisation and privatisation — the so-called Washington consensus — required the restoration of autonomy. In October 1993, the caretaker government of Moin Qureshi issued an ordinance to amend the State Bank Act to achieve this objective. However, the Act passed during the second Benazir government in February 1994 added the Monetary and Fiscal Policies Coordination Board. Headed by the Finance Minister, this board set the direction of monetary policy during the second Nawaz regime and the government of General Musharraf. His finance minister used the forum to lecture the governor of the State Bank not to take his/her autonomy too seriously. For three years after 2007, no finance minister held any meeting of the board. While considering an amendment in 2010 to abolish the board, the Senate Standing Committee on Finance censured them for ignoring the board. While the board survived, the amendments to the Act in November 2015 created a Monetary Policy Committee with the mandate to formulate it independently.
Autonomy, however, cannot merely be achieved by desired legislation. It has also to be exercised, a rare example of which was set by an acting governor last year by allowing rupee depreciation. That said, the recent breakdown of the Phillips curve, the inflation-unemployment relationship justifying autonomy, gives fresh food for thought to the SBP at 70.
Published in The Express Tribune, June 29th, 2018.