Credit is widely regarded as an engine of growth – an input used by public and private sectors to engage in economic activity that, in turn, fuels growth as well as employment opportunities. The cost of credit, interest charged, is linked to the policy rate that is set by central banks.
This explains why members of the Executive urge their central bank to reduce the rate of borrowing as a means to fuel growth. And why donor agencies like the International Monetary Fund (IMF) maintain that the rate be set not under political pressure — and that can be significant — but on the prevailing economic conditions – a standard multilateral policy advice that accounts for the insistence on a separation of powers between a central bank, to allow for independent decision-making on the policy rate, from the organs of state.
A research paper titled The Rationale of Central Banks authored by Charles Collyns and uploaded on the IMF website acknowledges the controversial issue relating to “whether the central banking institution should be subject in the last resort, to the decisions of the central executive office of government. The orthodox view would be that monetary policy, as an important lever of power, should ultimately be subject to democratic sanction, while the central banking institution may be given a separate voice in policy debate, the final voice should belong to the representative government. The opposing view would emphasize that monetary policy – like the administration of justice – must be able to resist undue political pressure.”
A 2026 IMF research paper sourced to the Middle East and Central Asia Department suggests that “a reform package to strengthen Central Bank Independence (CBI) should be tailored to each country’s circumstances and sequenced in accordance with local capacity and political economy realities. Enhancing a central bank’s legal framework, financial independence, and governance should be considered first-order priorities given their critical importance in shielding the central bank’s independence from political influence and preventing fiscal dominance.”
In January 2022, the then Pakistan government, after a stalled IMF staff level review agreement under the then ongoing programme, tabled the State Bank of Pakistan (SBP) Amendment Act in parliament which was passed with effectivity from February the same year. It was vigorously opposed by the then PML-N opposition as it granted central bank operational independence to manage monetary policy and price stability without government interference, and provided immunity to the Governor and his deputies from prosecution. Critics consider it appropriate to invoke the proverb that there is more than one way to bell the cat.
Be that as it may, on 22 August 2022, the PML-N government led by Shehbaz Sharif appointed Jameel Ahmed Governor SBP, for five years, eligible for a reappointment for another five years as per the amended Act. The question as with most laws enacted in this country is whether it is being implemented in letter and spirit.
It is fairly evident that the government has not overtly engaged in pressuring the SBP to reduce its policy rate as a means to fuel growth. And yet it is equally evident that the SBP has complied with the IMF’s directives since well before the Amendment was enacted and more so since 2019 (the country has been on a Fund programme since then) as the Fund’s conditions became harsher and more upfront on the grounds that Pakistan’s implementation of Fund advice on past programmes (the country is currently on its twenty-fourth programme) was poor. There are numerous examples that prove the veracity of this contention, including the following: the policy rate was left unchanged as headline inflation rose by 0.8 percent and core inflation by 1 percent in May 2026 (against April) and also remained unchanged while on 30 July 2025 inflation decelerated with core inflation decelerating by 0.1 percent.
There is further evidence that the capacity of a policy rate to check inflation in Pakistan is limited as succinctly noted by an SBP Additional Director Dr Fayyaz Hussain during a seminar: (i) excessive government borrowing from the banking sector. The government borrowed 4.75 trillion rupees from commercial banks in 2025-26 (it is unclear whether the 1.25 trillion rupees borrowed from 14 commercial banks to retire the circular debt was included) while as per the Finance Division credit to the private sector 1 July 2025 to 12 June 2026 was only 873.3 billion rupees or less than a quarter of borrowing by the government. Two further observations are in order — first the amount borrowed by the federal government is not used for development activities that would fuel growth but for current expenditure, which is inflationary in nature; and second, this is not the sum of government borrowing as it also issues treasury bonds and appropriates the entire amount of private savings as deposited in the national savings centres; (ii) routine administrative measures raising tariffs as per IMF standard conditions to achieve full cost recovery; (iii) the indirect taxes currently consist of around 70 to 75 percent of total tax revenue collected, and not included is the petroleum levy, a sales tax that is credited under other taxes to avoid being transferred to the divisible pool; and (iv) the informal sector that Dr Hussain estimated at 20 to 30 percent of the economy though other researchers place it at 50 percent.
To conclude, there is need to convince IMF staff of insurmountable domestic constraints, unique to Pakistan, which severely compromise the effectivity of a policy rate as a tool to check inflation.
Copyright Business Recorder, 2026
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