Seeking monetary justice?

The high policy rate of 13.25% is said to be killing business, making the interest cost of govt debt unbearable

First, there were the businesspersons, then the “independent” economists, followed by loud-mouthed cabinet members, all agonising over the monetary puritanism of the State Bank. The high policy rate of 13.25% is said to be killing business, making the interest cost of government debt unbearable and exposing an already vulnerable economy to the comings and goings of hot money. “Independent” economists can’t understand why the rate should be so high when the core inflation — the non-food, non-energy component of the Consumer Price Index (CPI) — is not exactly in the red zone. In the good old days, when the State Bank was a company with the government owning 51% shares, the government had to suffer through an annual general meeting speech by the governor on the state of the economy. Sometimes it provided another view, but was tolerated nevertheless, as monetary policy was coordinated with the fiscal policy when push came to shove. Former prime minister Zulfikar Ali Bhutto nationalised the State Bank and a credit budget began to be prepared alongside the federal budget.

It was then left to the caretaker prime minister, Moin Qureshi, to draft legislation for the autonomy of the State Bank in keeping with the international practice or, according to the grapevine, on the advice of the IMF. Ever since, each IMF programme has made the autonomy of the State Bank a key condition. Politicians loath to part with the little power they enjoy in our one-page model of governance. In the literature, there is a school of thought that questions the vesting of so much power in an unelected office. So, in the parliament that followed, the law passed included the creation of the Monetary and Fiscal Coordination Board and two three-year renewable terms rather than a single five-year term for the governor to keep the pressure on. The former has come in handy to curtain-lecture the governor, a lone presence in the Board dominated by powerful economic ministers. The finance secretary’s presence on the State Bank’s Board alone used to be enough to surreptitiously influence the course of the monetary policy. But the insertion of Clause D in the State Bank Act in 2015, to establish the Monetary Policy Committee not accountable to the Board of the State Bank, and without a representative of the Ministry of Finance, had somewhat diluted the role of the Monetary and Fiscal Coordination Board. Are we heading for its rejuvenation? Reportedly, a meeting was called to discuss the policy rate but was postponed at the last minute.

It would be for the first time in the history of the State Bank if the governor says nothing. Whether he is being his own man or, as some “independent” economists assert, the IMF’s man, is a matter of opinion. One thing is clear, though. He has stabilised the exchange rate. But that is one half of his mandate. The other half is inflation that continues to be a challenge. That is why, in his view, the policy rate can’t come down. An ex-IMF and now “independent” economist has taken the matter to the Supreme Court. The economy is still reeling from the judicial activism of the Chaudhry court and another successor. The bench, it must be recalled, got its nominal salaries written into the Constitution to protect independence. Each time a raise was required, the parliament had to pass a constitutional amendment. Remember Stephen Hawking also talked of inflation of another kind: “The Planck satellite may detect the imprint of the gravitational waves predicted by inflation. This would be quantum gravity written across the sky.”

Published in The Express Tribune, February 28^th, 2020.

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