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SBP Autonomy: The Debate...

The concerns about SBP being free from oversight, its lack of accountability, complete independence from Government or Parliament in terms of making its own laws, etc., appear exaggerated.

By Syed Salim Raza | July 2021


Concern about the proposed SBP law centres around the apprehension that given autonomy, central banks will prioritize inflation-control, and for an Emerging Market, over time, this emphasis would - unnecessarily - compress growth. Further, SBP ‘autonomy’ would put Monetary and Regulatory subjects outside the control or even influence of the State, with the SBP’s actions unchallengeable by any law-enforcement authority.

These fears seem misplaced. Monetary policy covers a wider context beyond inflation-fighting, and even more so, in the Emerging Markets. And further, national institutions draw their powers from the State, which can be withdrawn or amended. No state institution can be ‘a Vatican within Rome.”

The transfer of authority from the Ministry of Finance to central banks in the developed world was decided in reaction to the stagflation and boom-bust cycles of the ‘70s and early ‘80s. That instability had flowed from populist policies of governments, expansionary and inflationary, and relapse was always a risk while the Ministry of Finance remained the arbiter for both Fiscal and Monetary policy.

Central banks were then charged primarily with a single-goal, inflation control, by mainly applying a single-tool, the Policy Rate. Sustained low inflation was expected to assure financial stability, and steady economic growth. Certainly, in the upshot, by the mid-’80s, central banks had managed to curb the inflation of the ‘70s and early ‘80s; and with accelerating globalization, world economic growth became universally strong.

But economic conditions have changed.

In the developed world, post the fnancial crash of 2008, economies have remained bogged-down in near-recessionary conditions. Stability and growth have diverse constituents, and it is now recognized there, in fact, that low-inflation has been a hindrance to economic recovery.

In the Emerging Markets (EMs), too, central bank autonomy and inflation targeting has been adopted quite widely. But the EMs have limited Bond and Equity markets. The domestic Banking sector is the predominant source of capital for economic activity. This, along with higher poverty levels and critically needed growth in employment, implies that Central Banks have to balance inflation concerns (use of the Policy Rate) along with maintaining measures to support market liquidity and to ensure the flow of credit to leading sectors of the economy.


Compounding the challenge in Pakistan, is that our inflation is most often led by volatile supply-side price pressures on essential consumption items (food commodities, oil), where interest-rate actions would not impact demand (without serious social repercussion).

Also, Pakistan’s high levels of domestic Government debt and debt-servicing costs now dominate Government Budgetary expenses. It can be argued that interest-rate increases lead to higher budget-deficits, and, perversely, stoke inflation.

At the core of the recurring BoP crises is not high inflation, but a chronically low ratio of Investment to GDP.

Among EMs, Pakistan would count as an average inflation country – inflation between 2000 and 2021 has averaged 7%. At the core of our recurring BoP crises is not high inflation, but a chronically low ratio of Investment to GDP, around 15%. Regional countries, managing sustainable GDP growth over 6%, invest around 30% of GDP.

Low investment means inadequate domestic production. With two or three years of growth at over 5% of GDP, consumer demand leads to accelerating imports, and unaffordable expansion of the Current Account deficit. The result has been a recurring recourse to the IMF, and to austerity policies that slow down growth in order to achieve stability.

Strategies for a long-term rise in investment ratios is the broad responsibility of Government, not Central Banks. But Central banks could play a strongly complementary role in improving the business environment, e.g., by smoothening impacts of economic shocks, supporting emerging sectors and developing regulations to accommodate new forms for delivering financial services (i.e. the digital revolution).

For those apprehensive about over-cautious policies to preempt inflation, SBPs awareness of the priority of employment and growth is evident through its preemptive response to the potential impact of Covid. Interest rates were cut sharply, and a variety of low-cost, liquidity support arrangements were put in place for businesses. Pakistan’s economic contraction for FY 20 was limited to 0.7% of GDP, and growth has rebounded quite sharply, to 4%, in 2021.

Simultaneously, the SBP has not reacted to recent commodity price-pressures by raising interest rates, demonstrating that it tracks core inflation, and treating the CPI increases from Food and Energy as transient, until they ingress noticeably into core inflation.

Clearly, the SBP sees its responsibilities in the context of the broader issues that need addressing.

Moving on to the misgivings about lack of accountability for the SBP in the new Act, the unease is not justified.

The performance of the SBP will be transparent. The SBP will be judged by the quality of its appraisals of the economy, and the quality of its prescriptions. At a minimum, this will be evident to the public through the analysis presented in the SBP’s Monetary Policy statement, supported by data in its associated compendium; through public disclosure of the Monetary Policy Committees deliberations, and in the quality of the forward guidance provided by the SBP, publicly, in preparing the market for future policy trends.

SBP will provide reports to Parliament, which besides reviewing the economy as a whole, will specifically track progress and performance, against undertakings given.

Government’s authority over top-level appointments remains absolute. Independent Directors of the SBP Board, non-SBP members of the Monetary Policy Committee, and the Governor and the three Deputy Governors, are all appointed by Government.

SBP and the Finance Ministry will maintain dialogue in routine, with both accepting the need for some give and take, in the light of socioeconomic circumstances.

SBP’s access to Parliament remains solely through the Finance Ministry, for any changes in its powers. The SBP Executive Committee now proposed is not a ‘legislative’ body; it will deal with operational matters, within powers already granted.

The new Act proposes prior consent of SBP’s Board of Directors before a public investigation against SBP officials can proceed. This is not to place the officials above the law, but to acknowledge that there can be technical matters, or confidentiality issues involved. That is not to place the officials above the law, but to acknowledge that there could be technical reasons, or reasons of regulatory sensitivity, that may not be known publicly, and for which reasons, in the BoDs opinion, the action may not be considered impugnable. The 9-man (voting) Board, besides the Governor, consists of 8 non-Executive directors, appointed by Government for their professional expertise. Their opinion on whether a matter is judiciable or not, should be conclusive, or at the very least, a strong advisory signal for the agencies and Government to take into account.

Thus, the concerns about SBP being free from oversight, its lack of accountability, complete independence from Government or Parliament in terms of making its own laws, etc., appear exaggerated.

In conclusion: Monetary independence for Central Banks is necessary to check Fiscal imprudence by the Executive. Their deep fund of information and expertise, equally, makes Central Banks the appropriate authority for managing financial stability and engendering growth. In the final analysis, how independent Central Banks can be, will remain within the domain of the State.

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