Learning by doing

In the aftermath of recent (un)timely exchange rate depreciation and monetary policy tightening, a political and public discourse has been initiated on the responsibilitiesof exchange rate and monetary policy decisions. IMF has long supported SBP independence, and with successive Fund programmes, the institution's autonomy has kept on strengthening.

The monetary and fiscal policies coordination board (MFPCB) was formed in the 90s while the monetary policy committee (MPC)established under the SBP (Amendment) Act, 2015, and in between government director is removed from the SBP board. Thus, on paper, the central bank kept on becoming more independent and autonomous, but the ground reality in the previous regime (under Dar) was starkly different. Itslowly improved whenthe Miftah-Abassi duo replaced Dar, as they were not obsessed with sticky exchange rate.

Now the incumbenteconomic managers—the Finance Minister and SBP Governor—have attempted to separate pricing policy from politics, but the PM and power groups in PTI jumped in to subside the political pressure built after 30th November tighteningepisode. This opened a discourse on the true independence of SBP and the role of Ministry of Finance in making decisions by bringing life back to an otherwise dormant monetary and fiscal policies coordination board.

In Pakistan, numerous institutional frameworks and laws are present which are aligned to western standards of transparency and accountability; but these are seldom implemented in letter and spirit. The case of SBP’s independence and laws are no different, especially as it wasin the previous regime. And the obscure part is that SBP board, SBP's financial models and monetary policy kept on ignoring the growing fiscal issues. In economics, fiscal deficit leads to current account deficit and fiscal financing from central bank is inflationary in nature.

Media reports suggest that SBP governor and MPC members are taking a stand for central bank independence. That is great as today policy makers can openly challenge FM or perhaps PM too. That was not the case in Dar times, when no one could dare to raise voice against his policies without losing their job. The members of MPC are the same today and have been confused about economic challenges till Mar-18.

Till Dar was active, there was no signal of growing fiscal mess and its impact on overall economy in monetary policy statements or MPC meeting minutes. The reverse OMO, which had crossed Rs2 trillion, and its re-rolling was not highlighted as an issue. In essence, government borrowing from the central bank rerouted from commercial banks.

Even after Dar the hangover continued, the monetary policy statements and minutes narrated the confused state of the MPC and it raised questions on its impartiality and competency. For instance, in Nov-17, eight of nine members were for no change while in Jan-18, eight of nine members were for rate hike and another one eighty degree shift had taken place in Mar-18.

At one point (Jan-18), the stability is being challenged with indication of positive output gap (means demand exceeds supply), according to MPC minutes, to justify a rate hike. This was starkly different from Nov-17 minutes/statement. and then in Mar-18, the excess supply capacity to absorb demand was used as a rationale for no change.

How can macroeconomic fundamentals swing from one pole to another and back in a matter of four months? How can an economy move from demand exceeding supply, to excess supply, to meet a growing demand in two months? It seems like monetary policy decisions were premeditated and statements were tailored to ground decisions. That was a dangerous trend and could bring MPC's credibility into question. For details read "The State Bank needs a better model", "MPS: another rise?", "Reactionary approach", and "MPS: A timid approach" published between Nov-17 and Jul-18.
The point of peeping into the recent past is to demonstrate the capability and credibility of the MPC. The objective should be to build capacity at the central bank and MPC before passing on full responsibility of pricing decisions in their hands.

However, this does not mean that government should be left with no checks and balance. It's heartening to see that MFPCB is active with two meetings in two weeks. This is done on call of PM to form a mechanism of informing government on exchange rate policy.
Unfortunately, neither the FM nor the SBP Governor exactly knew what is in their respective jurisdictions in terms of managing exchange rate policy. But the blame goes to previous regimes where too much political interference made the institutions ineffective. It was their modus operandi to take dictation from the FM. Now things are reversing and its learning by doing for the policy makers.