Eyebrows were raised when the SBP Governor chose to have a press conference to share his views on the state of the economy. It came across more as abject defence of the government policies than an objective analysis of the economy's promise and pitfalls. Few days later, the Chief Economist of the Bank chipped in with an article, a rejoinder to a criticism of the recent IMF facility, to argue that it was a programme, and not an 'arrangement' as contended by the critics.
These are two recent instances of the Bank going public in support of the government. To the insiders, SBP's eagerness to toe the government line is now part of the corporate culture. The Governor was wrapped on the knuckles when he had the temerity to suggest the obvious: no matter how robust the foreign exchange reserves they will remain fragile as long as they were built on remittances and borrowings and not the more solid foundation of exports and FDI. The quarterly report on the State of the Economy, required under law to be an independent view submitted to the Parliament, is first 'sanitised' by the Ministry of Finance (MoF). It may be totally incidental but makes for speculation when the Chair of the Board Committee that oversees the quarterly reports gets a full time government job. The KASB ghost still stalks the SBP premises.
Under intense IMF pressure we now have a Monitory Policy Committee (MPC) rendered 'independent' through exclusion of the Finance Secretary's role. It is quite another matter that the 'independent experts' on the MPC are nominated by the MoF; the 'real experts' are SBP staffers, who constitute a majority and are frequent flyers to Islamabad. Plus, the Governor is only a phone call away! Any event, how can you have a Monetary Policy when the Government is a hugely dominant borrower, sucking up banks' liquidity that then needs to be massively replenished by the SBP?
None of the three immediate predecessors of the current Governor could complete their tenure, despite the security of tenure enshrined in the SBP Act. Two were made to 'resign' by the previous government and the last one by the present. Also, isn't it ironic that all public sector jobs are advertised and at least a modicum of selection process followed - even for Vice-Chancellors there are 'search committees - but for SBP the Prime Minister, or the Finance Minister if he has the necessary clout, can make anyone the Governor. Even the appointment of Deputy Governors is an unfettered governmental prerogative: recently, someone whose credentials consist solely of friends in high places was foisted on the Bank.
Central Bank independence has become a defining tenet of monetary orthodoxy. The idea is to insulate critical macroeconomic variables from the vagaries of politics and populism (Accountant's Charter of Economy?). An independent central bank is expected to raise its eyes beyond political expediency, accept inconvenient truths and plan long term, even if it means short term political costs.
On paper, SBP meets the requisite criteria of legal independence. Once appointed the government cannot remove the Governor before the completion of his three year tenure. Members of the all powerful Board also have an untouchable security of tenure. Insiders tell us it is another matter in practice - nothing substantive gets done without the Q block imprimatur.
It is the goal and instrument independence that are more critical. This is what provides the space for an objective setting of interest and exchange rates, money supply and monetary expansion, financial stability. In most countries goals (eg inflation) are set by the Government but instrument independence - the Central Bank setting policy instruments in pursuit of the goals specified by the Government - is sacrosanct.
Should central banks be independent? Can they be independent?
All this talk of independence has a short history. Until 1990s interest rates in the UK were set by the Treasury, and not the Bank of England - it was only at the BoE's three hundredth anniversary that the central banker extraordinaire, Stanley Fischer, successfully advocated independence to the old lady. It was the spectre of high inflation that made the case for strong and independent central banks, as it is of low inflation now. The recent financial crisis added impetus as astute politicians sought a protective shield. If things worked they could take the credit; if not, the central bank was there to kick the can. Many of Donald Trump's phlegmatic charges have been trashed but not the one about Obama's influence over the Fed Chair!
There is weak evidence of a positive relationship between central bank independence and economic performance, though on inflation the evidence is less ambiguous. It is now well established that inflation and independence are negatively related, even if causality is not clear.
There is also the issue of domain: in raising or lowering interest rates, for instance, the central banks are deciding how wealth and income are distributed (if they raise rates they favour savers at the expense of debtors; if they lower it is the other way round). This is a mandate creep. Political economy belongs to politics.
With autonomy comes accountability. Who is the central bank accountable to? The orthodox view is that it is accountable to the parliament that is expected to look at the outcomes. In our context it becomes a non-starter. First, there is often a time lag between action and outcome that exceeds the term of the parliament. Second, even if the outcome is found to be unsatisfactory the parliament is helpless given the Governor's security of tenure. Absent the parliamentary control the mantle is assumed by the Government.
Increasingly, it is transparency that is becoming centre stage: sharing with the public the why and how of the decisions; providing forward guidance; helping shape expectations of future decisions. Transparency is particularly beneficial when information asymmetries are themselves the cause of inefficiencies in the economy. SBP is playing at the fringes.
IMF has been the sole fighter for SBP independence. With the IMF out of the way, and politics heating up, will the SBP stand up to do what is in the best National interest? Or will it meekly succumb to pressures? It may be triumph of hope over experience but we like to think SBP won't let the Nation down.
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