Independence of the SBP

Parliament giveth with one hand and taketh away with the other. Or so it seems from the comments made by members of the parliamentary committee on finance, who two weeks back criticised the State Bank of Pakistan (SBP) for tightening monetary policy. It is somewhat comical that the same legislature that has only this past week taken active measures to curb a loose fiscal policy are now complaining about a monetary policy that is too tight. A parliamentary panel passed a bill last week that would restrict government borrowing from the central bank and would enhance the ability of the SBP to control monetary policy. This action would suggest that they agree with the SBP’s central diagnosis that the administration’s fiscal policy is flawed and needs to be institutionally kept in check. But on the same day, they decide to criticise the SBP for acting against that very same flawed fiscal policy and moving to protect the integrity of the rupee’s value. There is an inherent contradiction in those two acts and one that the members of the committee would do well to try and understand.


We believe that the SBP was right in its diagnosis of the government’s fiscal policy as being overly optimistic. We also believe that the central bank has, first and foremost, a mandate to curb inflation. There are both monetary and fiscal means to do that, though the SBP only controls the former and the finance ministry controls the latter. In this tug of war between the finance ministry and the SBP, the central bank is clearly the more responsible actor. We commend the parliamentary committee’s approval of proposals to strengthen the central bank’s independence. But they must understand that the SBP’s job, while often unpopular, is necessary. Legislators would serve the country well by not second-guessing a policy that they clearly seem to agree with.

Published in The Express Tribune, August 12^th, 2010.