The Bill to amend the “State Bank of Pakistan Act 1956” is exceptionally dangerous for the economy and the country. To date, the State Bank is an arm of the State and serves to address State policies. The amendment will make the State Bank autonomous from State domain and reverse the relationship: it will be the State that will be legally obliged to feed the State Bank.
The Bill is dangerous on three principal counts. One, it excludes any government representation on the State Bank Board of Directors. Two, it defines inflation control as the exclusive objective of the State Bank – to the virtual exclusion of the overall objectives of promoting development. And three, it compels the government to prioritize meeting the country’s foreign debt obligations over all other expenditures.
The Bill explicitly declares: “The primary objective of the Bank shall be to achieve and maintain domestic price stability”. The inflation control objective is to be pursued for its own sake1 and “… supporting general economic policies of the Federal Government with a view to fostering development and fuller utilization of the country’s productive resources” has been relegated as a “tertiary objective”.
Effective macroeconomic management requires monetary and fiscal policy to be administered in tandem with each other. However, the Bill will render monetary policy the exclusive domain of the State Bank and fiscal policy the domain of the federal government; thereby, delinking the administration of monetary and fiscal policy and, consequently severely compromising macroeconomic management.
Admittedly, governments have behaved irresponsibly over the last four decades in borrowing recklessly to finance non-development, including defence, expenditures. However, borrowing can also be a financing option for development purposes to create economic infrastructure assets. This the government will no longer be able to resort to. Development – and employment creation and poverty reduction – will cease to be an active agenda of the government.
The Bill will disallow Government borrowing from the State Bank. Of course, it will be able to borrow at costlier commercial rates from commercial banks, which will itself receive monetary assets from the State Bank. Thus, a permanent window of guaranteed and secure profits for commercial banks will be created. That over 80% of Pakistan’s banking sector is foreign owned is a point to be noted. The government’s revenues will bleed to meet its higher debt servicing obligations.
More dangerous is the part that addresses managing the foreign debt; i.e., prioritizes servicing foreign debt over all other expenditures. It actually mentions foreign creditors – the IMF, World Bank and ADB by name! The Bill effectively transfers decisions with respect to servicing foreign debt from the domain of the federal government to that of the State Bank.
To date, the State Bank is the depository of the country’s foreign exchange reserves on behalf of the federal government. The Bill will authorize the State Bank to service the country’s foreign debt out of available reserves without reference to the government. When reserves fall below zero, “the Bank shall request the Federal Government for a capital contribution to remedy the deficit” and “upon receipt of this request, the Federal Government shall, within a period not exceeding thirty calendar days, transfer to the Bank the necessary amount …” (emphasis mine). Clearly, the “request” is an order and it shall be mandatory for the government to act accordingly.
The implication is that if the government does not have the resources to comply with the State Bank’s “request”, it have to borrow; thereby, tightening the debt noose further. The government will exist only to service its debts and borrow more and more to service them. The government will be left wanting to meet even its salary obligations, including that of the armed forces. The Bill will eliminate remaining semblance of economic sovereignty and render the federal government politically impotent.
Left with a reduced resource base, different arms of the state – military, civil bureaucracy, provinces – will have to compete for the residual revenues – and competition will be savage. The military will be able to arm-twist the biggest share for itself and the provinces pushed to the bottom of the queue. The Constitution, the 18th Amendment included, and the NFC Award will be jettisoned under the doctrine of economic necessity. Democracy and federalism will be history.
A situation can be foreseen where tax collection efforts are forced to intensify to extortion levels, development activity slows down to minimal and essential public utilities are starved of even regular maintenance funds and collapse.
The resultant public protests against unemployment and higher cost of utilities – that suffer from routine breakdowns – can only be put down by repression. Human rights will be of academic interest only. Pakistan will move into uncharted territory.
- A note on inflation control is in order. Inflation can be caused by demand or supply factors. Demand-side inflation is caused by excess money supply over availability of goods in the market. Herewith, the State Bank’s monetary policy instruments emerge as the principal tool to regulate money supply. Supply-side inflation is caused by a rise in the cost of inputs used in the production process – increased cost of foreign exchange, energy, labour, etc. Many of these costs are a result of government policies and there is limited role of monetary policy in these respects. If the State Bank uses monetary policy instruments to control supply-side inflation, it will lead to recession.
(The views expressed in this article are not necessarily those of the newspaper)
Copyright Business Recorder, 2021