It is often argued whether the level of autonomy as provided to the State Bank under its Act is actually enjoyed by it or granted by Islamabad in its working. The latest to join the debate is the Institute of Policy Reforms which in its ‘Fact-Sheet’ released on 24th August, 2017 said that the Government of Pakistan must not restrict State Bank’s autonomy as it will help strengthen the economy. As for the present situation, worsening external account balance is of great concern. In four years, the government has added dollar 35 billion to foreign debt and its preference for high rupee value is hazardous. At some point, the rupee may decline suddenly. If this happens, it will leave the economy in long-term disequilibrium. The SBP has not met its foreign exchange management responsibilities. Each year, the economy has missed its growth targets. Inflation has been under control, but more because of a high rupee value and low oil prices than fiscal prudence. Fiscal deficit has often exceeded estimates with the government borrowing beyond the budget targets and at the cost of private sector credit. The economy is stuck with low savings and investment leading to low growth and a vulnerable external account. However, with autonomy, comes the need for transparency. The SBP must tell the parliament and the people how it plans to meet the rising external imbalances and other challenges.
The Institute of Policy Reforms, in our view, has rightly pointed to the weak areas of economic policy formulation and implementation in the country. There is no doubt that the SBP under its Act has been provided a lot of autonomy in designing policies related to monetary management mainly under the pressure of the IMF when Pakistan was under some kind of arrangement with the Fund, but attitude of the government has, more or less, remained unchanged over the years. In fact, the command of the government on the State Bank has increased during the present dispensation. This could be seen when the SBP had to reverse the decision of the depreciation of the rupee and the then Acting Governor was reprimanded for taking this decision without clearance from the government. It is also believed that major monetary decisions are also not taken without a positive nod from the government. The government also does not feel constrained by Section 9 obligation of the SBP Act which authorises the State Bank to set limits on GoP borrowings. Instead, it borrows according to its requirements from the banking system freely without seeking the necessary authorisation. The lack of due respect to the institutions would of course undermine the innovative spirit of these institutions and harm the economy. One of the reasons for the dominance of the Finance Minister could be that Governors of the SBP are often appointed at his recommendations and he is also the head of Monetary and Fiscal Co-ordination Board to set targets for growth, inflation and balance of payments. The Institute has suggested to change the appointment procedure of the Governor as well as the Board of SBP. So for as Monetary and Fiscal Co-ordination Board is concerned, the SBP must insist on its regular meetings and give greater input in its meetings. However, once the decisions in the Board are made, the State Bank must follow its own course and set its priorities to do the needful. There should be no gap between the legal and actual autonomy granted to the SBP and if the autonomy as provided in the Act is denied to the State Bank, the Governor should have the spine to say so and withdraw from the scene if the situation becomes intolerable.