One committee, two contradictory views

I had decided against writing on the latest monetary policy after a crisp editorial and an excellent piece by Meekal Ahmad. But two stories in this newspaper on August 4 convinced me to not let go. Printed next to each other and headlined thus – “NA panel sets limit on government borrowing from SBP” and “NA finance body rejects monetary policy” – the stories were not just juxtaposed literally, but figuratively as well.

Monetary policy is about regulating money and its creation by means other than currency. It must do that because of the continuing validity of the old adage that too much money chasing too few goods leads to inflation, something that hurts the people regressively when above a usually acceptable level. Under the existing law, the State Bank is empowered to prescribe borrowing limits for the government. The only trouble is that the very next clause in the law provides for a supra body called the Monetary and Fiscal Policies Coordination Board. With only one vote on the board, which is chaired by the finance minister, the State Bank cannot discipline a government showing stronger determination to spend than to tax.

The National Assembly panel mentioned in the first story, the standing committee of the National Assembly on finance, unanimously cleared the draft of a bill submitted by the State Bank to correct this and some other anomalies standing in the way of its autonomy. The draft has the weight of the International Monetary Fund (IMF) behind it. Of course, the draft bill still has to go through the National Assembly and the Senate to become an act of parliament.

The intent of this new act is to empower the State Bank to control inflation, mainly through its policy rate. Interestingly, the same panel has rejected the recent monetary policy statement of the State Bank, which aims to control the gathering inflationary storm by increasing the policy rate to 13 per cent. This is the message of the second story.

What does one make of it? Either the National Assembly body did not appreciate the implications of what it was approving, or there was the usual pressure to say yes to whatever the IMF says without reading the fine print. Approvals like this obviously show a lack of commitment to take the programme forward. Or it is just another reflection of the present policy anarchy, where the right hand doesn’t know what the left hand is doing? Already we have the fiasco over the sales tax on services. The IMF was told yes, the National Finance Commission (NFC) said no and the eighteenth amendment reinforced the NFC — all at the same time.

There are reasons for and against allowing an unelected person like the State Bank governor to hold so much power over the course that the economy should follow. A healthy debate in the standing committee would have prevented the contradictory signals given in the two stories. As democracy takes root, parliamentary supremacy must extend fully to economic space. This oversight job has to be performed by the National Assembly and Senate committees. The case for their strengthening cannot be overemphasised.

Published in The Express Tribune, August 6^th, 2010.