The State Bank’s short-lived independence

At a conference hosted by a private university in Lahore back in May this year, this correspondent ran into a ranking member of the State Bank of Pakistan (SBP). 

The meeting was not quite in the most official of settings and the event was closed to the public. The gentleman, who is a distinguished professional with years of experience on the policy end of the central bank, was there to moderate a panel and the conversation took place in a small break between sessions over sandwiches and rushed cups of tea. 

After exchanging pleasantries there was really just one question that was asked —  Whatever happened to the State Bank’s hard earned autonomy? “The autonomy is still legally and constitutionally there. I’m not sure what you’re talking about,” he responded with a light chuckle. 

The reality of the matter was clear. The State Bank of Pakistan (SBP) Amendment Bill 2021 had made sure the SBP was autonomous and could control inflation targeting. At the time the SBP’s governor was Reza Baqir who fought a long battle to ensure the independence of the central bank from the finance ministry. But despite the bill being passed in February 2022, the SBP’s autonomy seems to have been short lived. By the time Reza Baqir’s term as governor ended in August 2022, the government of Imran Khan which had passed the SBP autonomy bill had been dismissed through a Vote of No-confidence and the Shehbaz Sharif led coalition government had come to power. 

That is when Jameel Ahmad came to power. Meek, not gifted with the same natural charm or communication skills that Reza Baqir had, and much less of a public figure, Jameel Ahmad has operated the SBP from the shadows. During his time as governor, the functioning of the central bank has gone back to the status quo that it has followed for decades — that the bank is controlled through the finance ministry. This was the real question being asked of the SBP member at the university conference. 

“Look, different people have different management styles. Some are more public in their decisions while others like to operate a little under the radar without ruffling too many feathers,” he said when asked directly how Governor Jameel Ahmad measured up to his predecessor. Just as he was saying this Dr Ishrat Hussain passed. Without stopping or turning to look at us, he simply wagged his finger in our direction and said “let’s not kid ourselves on the question of autonomy here gentlemen” and walked on ahead. 

That, more than anything else, summarises the reality of the State Bank Autonomy Bill 2021 that was the topic of fierce debate for months. Despite its passage its implementation is virtually non-existent. And any claims of the hard-fought autonomy still being there in practice are little more than us kidding ourselves.  

The origins of autonomy 

The autonomy of the SBP was the hottest topic in Pakistani politics at the start of 2022. The equation was pretty simple. The IMF wanted a bill to be passed which made the SBP autonomous and empowered it to manage monetary and exchange rate policies. 

“Globally, the majority view is that central banks must be free of government control but must coordinate their work with them. Since bad monetary and exchange rate policies can cause far more and quicker damage than fiscal profligacy, they reside safer with a free central bank focused mainly on inflation,” explains economist Dr Niaz Murtaza. The passage of the bill was one of the earliest sticking points that had made reaching an agreement with the IMF difficult. To put it very mildly, the new amendments in the SBP law made the governor of the SBP independent from the state and not accountable to them either. The only thing the governor would have to wait for was his appointment after which it would be for the governor and the Monetary Policy Committee to determine monetary policy. 

At the time, opposition parties voiced their concerns loudly claiming it compromises Pakistan’s “economic sovereignty” and gives absolute authority to the SBP to take key economic decisions independently. This wasn’t necessarily a bad thing. Monetary policy should ideally be used to control inflation, especially in a country like Pakistan where it has been the biggest problem for the general population. 

Tighter autonomous control over money supply by the SBP, to control inflation also prevents the government from using the SBP to fund runaway expenditure. In short, an autonomous State Bank that works closely with the finance ministry is good for the professional management of the economy. And for a few months in 2022, it seemed we had reached that point. Then the politics came back into it. 

How the autonomy was lost

The State Bank Autonomy Bill 2021 is still law. That means under it the incumbent Governor Jameel Ahmad is an actor independent from the state and monetary policy including interest rates can be set at his and the bank’s MPC’s discretion. What we have seen in the first year of his tenure is the very opposite. 

In the months he has been in charge, the governor has not once stepped out of line with the incumbent government. In fact, when the recent deal with the IMF was still being negotiated, he called an emergency meeting of the MPC to adjust the interest rate in accordance with the fund’s requirements — something that was in the interest of the government. 

“The environment in the SBP changed overnight after Reza,” says one former high ranking member of Governor Baqir’s team. “I left soon after but you could tell that the new governor was not just in close contact with the finance ministry but was in fact very much taking direction from the ministry on what to do and what not to do. This was back to the old system before the autonomy bill was passed.”

Due credit must be given of course. Governor Jameel took over at a precarious time. And while his predecessor had a more outgoing style of management he had a very different environment to manage, including the Covid-19 pandemic. Mr Jameel has come in at a time when political tensions have been high and toeing the line is the cautious approach. 

It is ironic actually that it was originally the IMF which had demanded the independence of the SBP since the government ended up directing the SBP to act in a way that would secure the IMF deal. While his legacy may still change given he has two more years in the job, it will likely not be remembered for preserving the bank’s autonomy.