National interest out, IMF in

Every month since PTI govt in August 2018, overall rate of inflation has been consistently and significantly higher

A government that prides in keeping “national interest” above all else was caught napping when it approved sweeping changes in the State Bank Act. The preamble that has existed since 1956 states: “WHEREAS it is necessary to provide for the constitution of a State Bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilisation of the country’s productive resources.” In the new preamble, the italicised words are missing. So allergic to growth, the drafters omitted it too. Domestic price stability is the primary objective now. The development of the productive resources is not even a secondary objective. Even Its relegation to the tertiary level is without prejudice to the primary objective. After the unexpected lead in the first innings against the Pakistan Democratic Movement (PDM), the Prime Minister has announced the second innings against prices. In haste now characteristic of him, Team State Bank has been launched to play this innings.

To achieve domestic price stability, the draft law rests on the now-defunct neoliberal consensus on the correlation between low inflation and central bank independence. Correlation is no indication of causation. The evidence in developing economies is mixed anyway. Inflation here is not always a monetary phenomenon. While the State Bank can regulate the supply and demand of money, it has no levers to influence the prices of food and energy, the main sources of trouble. Every month since the PTI government in August 2018, the overall rate of inflation has been consistently and significantly higher than the non-food, non-energy inflation due, in the State Bank’s own words, to “(i) supply disruptions in major food items stemming from delayed crop arrivals, speculative activities and weak commodity management; (ii) duties and taxes levied/increased in the Budget 2019-20 on multiple food items including sugar, cigarettes, edible oil and ghee; (iii) price adjustments on account of exchange rate depreciation that took place towards the end of FY19; (iv) tighter border management by custom authorities; and (v) higher transportation costs following the increase in fuel prices as well as the implementation of the axle-load policy.” Regardless, the new law premises that absolute independence is a necessary and sufficient condition for price stability.

Already, the State Bank enjoys operational autonomy and a free hand in the formulation of monetary policy. It is accountable to the executive through the Monetary and Fiscal Coordination Board and the finance secretary’s membership of the board of directors. Now the State Bank will be accountable to the legislature, an increasing practice in the world and a step in the right direction of democratic governance. But, unlike the Federal Reserves’ appearances before the Congress, the State Bank only has to present its annual report. Quarterly reports are already placed before the Parliament. In addition, functional and financial accountability has been limited by a routine role of the Auditor General and taking the National Accountability Bureau (NAB) and Federal Investigation Agency (FIA) off the back. Most worrisome, there is no accountability in terms of objectives. While the government will not have access to note printing, forcing borrowing from commercial banks, there is no accountability of the State Bank for failure to achieve inflation targets. I have repeatedly said that autonomy has not merely to be legislated, it has to be exercised as well. The main obstacle here is the renewable tenure for the governor. Even absolute autonomy may be compromised as the renewable contract of the governor has not only been retained, the terms have been increased from three to five years. Once is enough.

Published in The Express Tribune, March 19^th, 2021.

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