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he State Bank of Pakistan Autonomy: Myths & Facts
By Mir Mohammad Alikhan
Every economist is a human being and just like all human beings, some are pessimistic and some are optimistic. But as a person with the knowledge of financial and economic matters, comes the responsibility of looking at the matters objectively. Especially when that person is being looked upon by the masses for an honest opinion and guidance. But in Pakistan our political inclination overshadows our opinion. When our voted party is in power, we support its every move and we do not when it is the reverse. What we forget in this circus of support that Pakistan gets left behind and no leader, no political party is above the betterment of our country, Pakistan.
Now to the point of this article. For the past one week opinions bases on other peoples’ opinions those opinions camouflaged in an enigma wrapped in a riddle are doing rounds across Pakistan. The point in discussion is the autonomy of The State Bank of Pakistan. Having opinions opposing the autonomy or supporting it is everyone’s right but in financial matters the right has to be based on knowledge and not just opinions.
In this article I will try to debunk some of the myths and misconceptions doing rounds about The SBP.
Myth Number 1.
The IMF will have the control of The State Bank.
Nothing can be further from the truth. Autonomy means independence and independence dictates that it does not take orders from anyone, let alone a foreign agency. We are focused and misguided about the role of The IMF because we are currently under an IMF program. The moment we pay them back, we have no ongoing relation with the IMF. SBP is our domestic agency and will remain a domestic one. We do not go to the IMF again and we will have no link to the IMF, let alone being dictated by them.
Myth Number 2.
The GoP is Turning SBP Autonomous Without Our Say In It.
Absolutely wrong. The SBP is NOT being made autonomous through an ordinance. It is a BILL that will be put through the National Assembly of Pakistan. A healthy debate will be created in the Parliament. The Pros and Cons of the bill will be discussed. The Bill will be voted upon and if our elected officials do not find it to be beneficial for the country then the bill will be voted against. Isn’t this the way democracy does and should work ?
Myth Number 3.
Autonomy will make the SBP rogue and a runaway institution.
As a person of financial background, it makes me smile. It makes me smile because the countries that we “supposedly” look up to in the West, the democracies that we want to emulate, all have independent central banks. Even the President of The United States cannot dictate to the Chairman of the Federal Reserve what to do. And that is the way it should be. Why ? Because governments have one thing on their mind when they are in power, to be reelected and that goal of reelection taints all objectivity. The government wants to remain popular while in power. It may have many short term quick fixes in mind for the economy that impede long term growth of a developing nation. A sound financial system including an efficient payment system is vital to a market economy. An autonomous central bank anywhere in the world has more credibility and more credibility means a better investment environment for the domestic as well as the foreign investors. Have you ever though why Pakistan has never crossed $30 billion in FDI in any single year while countries of our size and economy are touching exponential growth figures ? One of the biggest reason is because investors know that the Minister of Finance can anytime dictate to the Governor of the SBP what to do and that gives no confidence to the investor.
Myth Number 4.
The SBP Will Do What It Wants To Do And Will Not Listen To Anyone.
Another lie. Once the autonomy comes through a bill in the National Assembly then it comes with conditions, reporting features, goals, financial yardsticks, a step by step plan that the SBP will have accomplish on a quarterly basis and report to the Standing Committee of the National Assembly. This is the way it works in any democratic set up. Democracy means not interfering in government institutions and forcing them to make decisions that favor the government with its outcomes.
Myth Number 5.
An Autonomous Central Bank Is Bad For Pakistan.
Wrong, wrong and wrong once more. We want a Central Bank independent from governments’ influence. More and more central banks have become independent in the past 52 years around the world and the economies of those countries have flourished because there was no government influence. Imagine a Judge reporting to the Law Minister of Pakistan, do you think that the judgements will not be tainted in the favor of the government ? That is your foundation for the thoughts when it comes to an independent central bank. If you think that all judges reporting to the government or the Chief Justice of the Supreme Court reporting to the government is good for the judicial system of Pakistan then the Governor State Bank reporting to the government is also good. We are being led by fears. Fears of everything going rogue because we as a nation love control of everything in the hands of our government. Well, certain things should never be in the control of the government. Never.
Myth Number 6.
An Independent Central Bank Will Make ALL Decisions About The Economy And Interfere In All Governmental Financial Matters.
Please understand that a central bank is limited by its charter and will always remain limited by its charter for 3 decisions. It can only make decisions about:
A. Conduct Monetary Policy
B. Regulate Banks
C. And Provide Financial Services Including Economic Research.
And that is where the buck stops. The rest and all remains with the government.
Myth Number 7.
An Autonomous Central Bank Will Have No Accountability.
Is there any governmental institution in a democratic set up that has no accountability? No. It is not possible for an institution to be given independence through a bill in the national assembly and the legislators not put accountability measures on that institution. It would be the fault of our parliamentarians if they fail to put clear objectives and accountability measures along with the independence. “The delegation of authority to conduct monetary policy to an autonomous and accountable central bank with clearly defined objectives can enhance both credibility and flexibility. ... An autonomous and accountable central bank may help prevent undue influence from adversely affecting the financial sector.” This is the worldwide consensus of the top economists around the world.
Myth Number 8.
Independent Central Banks Have Failed Around The World.
Independent research conducted by all financial institutions have clearly shown with theoretical and empirical evidence that independent central banks perform better, keep inflation low, and make decisions in favor of the people rather than in favor of the government.
Now, what we need is absolutely defined goals for the SBP and accountability measures. A reporting system clearly defined by the National assembly of Pakistan where the Standing Committees have financially knowledgeable representatives who monitor the progress of the SBP.
Secondly, there is no immunity given to the Governor of the State Bank. The immunity will and should only be for the term in office so the Governor works without any threat of interference or arm twisting. Just like many positions in governments around the world where the immunity lasts as long as the post lasts. Once the person leaves the post he or she could be sued or held accountable for actions, if detrimental towards the common interest of the state and its people.
At the end, I would request that the national assembly allow the debate on the autonomy of the central bank to be televised live on all TV channels. This matter has to be seen by all Pakistanis, being discussed in the national assembly. Let not the government or the opposition tell us what they think, let us all develop a consensus around the country.
Fears and unfounded fright needs to be fought with facts and historical figures.
Not with more fear.