From direct to indirect: SBP's rewiring of Pakistan's financial architecture

The passage of the State Bank of Pakistan (SBP) Amendment Bill through the Senate on January 28, 2022, was no smooth affair. With a razor-thin majority of just one vote (43 in favor, 42 against), and amid opposition protests decrying "financial imperialism," the bill promised to end direct government borrowing from the SBP. The financial press celebrated this IMF-mandated reform as a triumph of central bank independence. But the SBP had other plans in mind, quickly setting up an alternative system that would prove even more effective at channeling money to government securities.

What unfolded after independence was akin to a carefully orchestrated card game. As the house, the State Bank first changed the rules of play, then invited more players to the table, and finally showed remarkable flexibility about how strictly those rules would be enforced. 

Our story follows this transformation: First, we will see how SBP redesigned the basic mechanics of money flow through creative use of open market operations (OMOs). Then, we will watch as they expanded the player pool beyond traditional banks. Next, we will examine how the players exploited these changes, pushing leverage to unprecedented levels while the referee conveniently looked the other way. Finally, we will see how even other regulators joined in dealing cards from the same deck.