As the new National Security Policy (NSP) unequivocally states, geoeconomics is the new paradigm through which Pakistan will shape its security calculus. As a whole-of-government document, the NSP directs the entirety of the state machinery to work towards the realisation of the country’s geoeconomic ambitions. However, not all departments or ministries are equally central to the cause of geoeconomics, as one would expect, since there are always specific agents who lie at the vanguard of strategies and policies. In the case of geoeconomics, it is the Ministry of Finance (MoFin) and the State Bank of Pakistan (SBP) who shall stay at the vanguard with their outsized role in the new paradigm. Yet the degree to which they recognise this, or are empowered or prepared to drive this agenda, remains to be seen.

We can draw lessons from other countries that have wholeheartedly pursued geoeconomic strategies to assure national security and social development, and notable in this regard is post-war Japan. In the aftermath of World War 2, the Tokyo government empowered the Ministry of Finance to lead a semi-planned economy approach to national development, and the Bank of Japan (BoJ, the central bank) was subservient to the Ministry of Finance in that regard. As such, the Minister of Finance of Japan was by far the most powerful man in the country, reflecting the geoeconomic purpose of development that his ministry shouldered as a pillar of post-war national security.

Meanwhile, the BoJ would use instruments such as “window guidance” to dedicate monetary power that bolstered the fiscal strength of the country, and both would then be used towards specific geoeconomic purposes such as concentrated industrial development. There was a strong alignment between the BoJ and the Ministry of Finance on their geoeconomic purpose, and they worked closely to drive a development agenda that made the country the 2nd largest economy in the world. However, as foreign (IMF-style neoliberal) ideology creeped in, the BoJ began to work at cross-purposes with the Ministry of Finance, literally engineering an economic bubble (which popped in 1989) that would discredit the ministry, and thus lay the groundwork for an extremely powerful BoJ that no longer served the national geoeconomic interests but instead froze the nation’s potential under an ideological shadow. Japan has never truly recovered from this.

One must then draw the parallel with the new relationship that is emerging in Pakistan between its central bank and the government, as envisaged in the SBP Amendment Bill. One is obliged to say that, if anything, the bill makes the central bank into less of a national security asset and perhaps something of a potential liability. This is because it absolves the SBP of the need for coordinated fiscal-monetary objectives. It gives an outsized paycheque and blanket immunity to a governor who can invoke new privileges to keep himself or herself at a distance from the overarching priorities, and narrows the mandate of the bank itself.

The SBP is also absolved of the important “quasi-fiscal operations” that it undertakes, which are an extremely useful tool for economic coordination and for assistance to key economic sectors. Pakistan would not have succeeded economically during the Covid-19 pandemic the way that it did without the proactive quasi-fiscal role that the SBP undertook during 2020, and this is something that will not be possible under the amendments.

More importantly and worryingly, the government will not be able to engage in new net borrowing from the SBP and will be forced to tap the commercial banks, who have private interests at their core and charge higher interest rates which public money will have to repay. In a time of economic crisis, the new SBP may not be a reliable pillar to assist the government through monetary support, and can even pursue its own agenda blatantly while seated in Karachi. This is particularly true if it is the IMF that is orchestrating the appointments behind the scenes.

In the new scenario, then, the SBP might not remain at the vanguard of geoeconomic imperatives, even though a central bank is, as the Japanese example illustrates, a core institution in a truly geoeconomic vision. As with the engineering of Japan’s bubble, where the Bank of Japan worked against the Ministry of Finance to dismantle the successful national development model, the SBP can both actively and passively work against the government at many levels, thereby stymying the necessary coordination of fiscal and monetary policy for the purposes of geoeconomics.

It is a supreme irony that the SBP Amendment Act has been under consideration at the same time that the NSP has touted geoeconomics as the vehicle for the attainment of national security. The two are working at cross-purposes, and thus unmoor the logic required for coherent policy pursuit. If geoeconomics lies at the core of national security, then the central bank lies at the core of geoeconomics, and must be aligned to serve at the vanguard of the new national security paradigm.

Dr. Usman W. Chohan
The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at cass.thinkers
@gmail.