Well, the government now aspires to interfere or for choice of better words, wants to influence the decision-making process at the State Bank of Pakistan (SBP). Needless to say, yet again an elementary, but an age-old mistake in the new Pakistan! Relations between the Prime Minister and his Finance Minister with the Central bank (SBP), of late, seem to have become tenuous, post recent rocky cum abrupt decisions by the SBP officials relating to unprecedented levels of Rupee (Pak) devaluation and interest rate hikes. All sorts of accusations are being hurled at each other and a blame game appears to have been un-leashed from both sides: Was informed; was not informed; Finance Minister was informed while the Prime Minister only found out through the television channels; SBP is independent but still not independent or shouldn’t be to the extent it is now; etc. etc. Tempers are flaring among the key players including of course the prime minister himself and some of his close advisors on one side and the stubborn top SBP bosses on the other side who claim that they plan to stand firm in maintaining the institution’s independence at any cost.

However, the government’s stance is that it has been elected to mend the economy and to give relief to the people, so therefore, the Central bank naturally needs to consult it or seek its permission before taking any major monetary policy decision that can either adversely affect the lives of the common man or disrupt governmental policies aimed at turning around the economy. Fair enough, but then it should not be looking to control the central bank, but to instead insure that it installs a competent (but autonomous) team at the apex financial institution. This includes not just the top tier executive management at the central bank, but also a professional and diversified board needs to be put in place, which has the skills to oversee all facets of both, theoretical & practical financial management. By any stretch of imagination, the current performance of the SBP has been shoddy, to say the least. Knee-jerk decision making and over-reactive measures have not only eroded public confidence on national currency, but the unnecessarily high hikes (150 basis points in one go) have also left the investors thinking on any future potential investment plans. Instead a more prudent and gradual approach should have been adopted to allow both the businesses and the government time to plan things properly before making any dramatic changes – Panic in the markets, as we know, is never good for economic prospects of any country.

The trouble though is that such an erratic scenario does not paint a very good picture of the government’s economic-management-prowess either. Sensible economic teams are always quick to build a rapport with their respective central banks to ensure a combined thinking and direction on country’s monetary policies going forward. Now some sceptics may argue here that the events we are referring to may already be synonymous to a ‘fixed match’ as the government prepares to meet the IMF (International Monetary Fund) conditionality’s in order to bail itself out of a looming default. But if so, then a show like this becomes even more damaging, because such glaring dependency runs the danger of destroying the very credibility of the entire economic decision-making apparatus in Pakistan.

So, how then should the government proceed on such a delicate matter? The answer lies in the will of the government to make appointments in the central bank based truly on merit (both competence and reputation) while genuinely respecting the independence of the State bank of Pakistan. Once a robust institutional mechanism is put in place, the results will follow automatically. And it is in this context that our neighbour India’s example of its Reserve Bank of India (RBI) is important. Over there, Dr. Y.V. Reddy can be termed as one of the architects of economically modern and transformed India of today. A man of many facets – activist, bureaucrat with a diversified experience, economist and a realist – he reached to be the Governor of the Reserve Bank of India (RBI), to lead a five years period of Indian stability and sustainable progress. Somewhat in his own words: When I took over, the Reserve Bank of India was a place that was often hard to justify in democratic or institutional terms. Except for a few cranks and obsessives, almost nobody could even explain how it worked, let alone develop an informed opinion about the policies that emerged from it. My principal battle was for a culture of professionalism at the RBI. Today, perhaps we see that it were in fact his efforts that bore fruit in seeing likes of Raghuram Rajan and Mr. Urjit Patel, as his successors. Former governor Raghuram Rajan’s (an international celebrity in economics and finance) tenure was not extended by the government of Mr. Modi’s UPA (United Progressive Alliance), as he was seen to have major differences and an uneasy relationship with the finance minister, Mr. Arun Jaitley. Mr. Urjit Patel (a Yale graduate) was instead brought in, as he was seen as someone close to Mr. Modi, but even under him, recent months have seen a sharp deterioration in relations between the RBI and the Indian finance ministry. When it comes to the independence of the RBI, Mr. Patel has refused to budge and says that there are ‘No Compromises’. The RBI demands that 11 of the weakest banks be brought under the PCA (Prompt Corrective Action) to prevent a major banking crisis brewing in India and to check the presently rather free cum generous lending to the micro, small and medium enterprises (MSME). Naturally, with elections ripe in India, this directly clashes with the fortunes of the ruling BJP-led government, because the MSME not only generates the largest number of jobs in the Indian economy, it also accounts for 45 per cent of its GDP and around 40 percent of its exports. While surely, sooner or later, a more pragmatic arrangement will be struck between the two sides, the real point is that amidst this controversy no one can turn around and point a finger at the sheer competence or the exemplary standing of the two main decision makers in the RBI, Mr. Urjit Patel, Governor, and Mr. Viral Acharya, Deputy Governor. Incidentally, as per the latest reports, Mr. Patel has opted to resign instead of yielding to compromise RBI’s autonomy!

Alan Greenspan (Former Chairman of USA’s Federal Reserve) once remarked that, “heading the Fed requires much more than mere competence and understanding. It requires a nose, intuition, vision and a belief in monetary management to keep the economy in the right direction.” He obviously was not talking about central bank governors in South Asia. Over here our governors have been typically considered to be subservient to the Finance Minister or the government of the day, displaying little independence or assertiveness over the years to guard the autonomy of the institution they represent.

Fortunately, this though may be gradually changing. As globalization firmly takes root, the central bank is too important an institution to be taken lightly, given the complexity of managing national economies on an increasingly international canvas. What our governments in Pakistan also need to remember is that independence and autonomy of a central bank is of paramount importance in a country’s economic governance, as it plays a pivotal role in safeguarding national currency, controlling inflation and keeping sanity in allocation of national financial resources; often proving to be the bulwark preventing the government turning into a predator on to its own people. Compromise this role and you a see: a government encroaching on private sector’s domain; capital moving from efficient entrepreneurial private sector hands to the often in-efficient cum non-transparent hands of the public sector managers; and most dangerously, accumulation of unsustainable or unserviceable debt by the government.


The writer is an entrepreneur and economic analyst.