Please do your job, SBP tells finance ministry

The State Bank of Pakistan takes a not-so-subtle jibe at the finance ministry as being responsible for the inflation.

KARACHI: In announcing the surprise increase in the benchmark interest rates, the State Bank of Pakistan (SBP) took a not-so-subtle jibe at the finance ministry as being responsible for the runaway inflation.

In the first monetary policy announcement since the new Governor Shahid Kardar took over, the central bank laid out a frank and rather bleak assessment of the economy and the monetary and fiscal pressures which led them to increase the discount rate, the interest rate at which banks can borrow from the SBP’s discount window. It is widely recognised as the country’s benchmark interest rate and was increased by 50 basis points to 13.5 per cent.

The new governor’s fingerprints were all over the announcement. This is clearly not a man who is content to rely on his staff to do the heavy lifting when it comes to drafting key policy documents. He has, over the past few weeks, established himself as unabashedly in favour of free private enterprise and a limited role for government in the economy. The most recent monetary policy statement made it clear that the central bank would be pursuing policies to that effect.

The central bank has been arguing for quite some time that the finance ministry needs to get control over the fiscal deficit. This time was no different as the first reason that the central bank gave for their move to increase interest rates was the federal and provincial government’s inability to even do an honest accounting of the fiscal deficit, let alone come up with a credible plan to bring it under control.

At this point, the SBP has been screaming about the government’s inability to raise revenues. One almost gets the impression that if they could take over the revenue collecting arms of the government, they would. The finance ministry for its part has been unforgivably spineless in its refusal to go after tax evaders, let alone taxing sectors of the economy that have powerful enough lobbies to legalise their exemptions from the tax net.

Yet the central bank itself should not be let off the hook entirely. They have allowed the government to monetise the national debt – in other words, print excessive amounts of money – without much resistance. Rumour has it that the last governor resigned owing to the government’s refusal to stop trying to print its way out of its money troubles. Salim Raza was never known as a pushover but even he could not resist the finance ministry’s pressure. Let us hope that Kardar is made of sterner stuff.

Published in The Express Tribune, September 30^th, 2010.