Central bank’s independence and govt responsibility

The last couple of monetary policy statements, and over the years in general, the State Bank of Pakistan (SBP) – with the country both in and outside of an International Monetary Fund (IMF) programme – has continued to remain highly influenced by neoliberal/neoclassical economic philosophy of adopting over-board monetary austerity policy — that is seeing inflation as mainly a monetary phenomenon, and curtailing it through raising policy rate to squeeze aggregate demand mainly — and hence monetary policy has remained over-cautious.

The extent of it has been so extreme that while CPI inflation has been in single digit since August 2024, real interest rate continued to remain significantly in the positive; where currently it stands at 5.4 percent. In a developing country context, where inflation generally is at least equally a fiscal phenomenon, and in the specific context of the catastrophic flooding taking place a few months ago, clearly showing that inflationary pressures will likely mostly originate from the aggregate supply-side.

Here, among the underlying reasons for holding policy rate at 11 percent by SBP in the October 27 monetary policy statement included ‘…volatile global commodity prices; challenging export prospects amidst the evolving tariff dynamics; and potential domestic food supply frictions’, are virtually unfounded given global commodity prices, especially that of oil, continue to remain quite away from the highs in prices from a few years ago, and as indicated in IMF’s October 2025 edition of World Economic Outlook (WEO) tariffs had a much less impact than thought back in April when they were announced due to lack of tariff wars overall globally.

The WEO report pointed out in this regard, ‘To date, more protectionist trade measures have had a limited impact on economic activity and prices. …The unexpected resilience in activity and muted inflation response reflect—in addition to the fact that the tariff shock has turned out to be smaller than originally announced—a range of factors that provide temporary relief…’

SBP, therefore, is under the heavy influence of neoliberal philosophy, as reportedly reflected both through its number of recent MPS, and overall in general for many years now, and through its reported commitments given to IMF, as reflected, for instance, in IMF’s October 14 press release no. 25/345, where it is apparently in agreement with the authorities in Pakistan to continue with a cautious monetary policy stance, as pointed out in the press release as: ‘The State Bank of Pakistan (SBP) remains committed to a prudent monetary policy stance, guided by incoming data, including the impact of recent floods and the evolving economic recovery, to ensure inflation remains durably within its target range of 5-7 percent.’

The issue at hand is that while neoliberal policy has continued to come under severe criticism internationally in the wake of Global Financial Crisis (GFC) 2007-08, especially in its lack of ability to view economic landscape away from so called realities announced under the neoliberal framework, and in the lack of success of this approach in bringing any reasonable level of sustained macroeconomic stability, and economic growth, there has been apparently no revision of policy mindset as such of IMF, SBP, and the government at large.

While IMF policy revision agenda mainly needs a global movement – voices towards which end have continued to grow louder, especially in the wake of failed experiment of austerity driven policies in Eurozone in the wake of GFC 2007-08, and in particular after the highly visible capacity of both fiscal-, and monetary policy to deal with fast-unfolding shock of existential threats of climate change crisis, and related Covid-19 pandemic – with G7 group of countries taking the lead, with obvious reasons of economic, and political presence in the global landscape, Pakistan’s government, and SBP need to be critical of their policy approach, and in reversal thereof, adopting a more rigorous revision of the neoliberal policy mindset.

It needs to be understood that while it is important to have a meaningful level of central bank independence to safeguard its decisions from political short-termism likely to be inherent over the election business cycle, government, or more precisely related economic ministries, or economic institutions — under the leadership of the PM — need to revise the ‘rules of the game’ for the country’s central bank, the SBP, through appropriate legislation in reversing the assault of neoliberal mindset, which (wrongly) continues to see an over-board role of aggregate demand squeeze policies.

A 2020 published article ‘Independence of central banks: the need for an urgent revamp!’ pointed out in this regard: ‘Whereas for a full generation, such independence of central banks was supported and accepted by economists and by the public, over the last 2–3 years, it has become an object of criticism and negative assessment.

Central bankers have been criticized for: using public money to support banks and private firms in the aftermath of the 2007–2008 financial crisis, the protracted periods of low inflation and growth as well as the increased distributive inequalities which followed, [and] the inability of their models to forecast accurately and thereby the delays encountered in meeting their own objectives. …The purpose of this paper is not to deny each of the points above. But rather to demonstrate that opponents of central bank independence have missed the mark in their conclusions and that no more time should be lost discussing the merits or weaknesses of central bank independence.

Instead, by equipping central bankers with the mandates, tools and values best fitted to help them face past and future shocks, the independent central banks can help better achieve the broad socio-economic objectives of society and do it legitimately’. It is indeed the responsibility of the government to provide such an improved mandate to the SBP, one which is not neoliberal in nature, which is not to say that SBP is totally absolved from criticism for not reportedly making efforts with government to make such revisions.

The first action, then, is the correction in the framework, or the ‘rules of the game’ being provided to the SBP, where the central bank of course needs to be consulted in revising these rules in the light of economic history – both domestic, and international. It is indeed the responsibility of the government to protect the interests of the demos – in this case, economic, which in turn anyways also feed into the level of political voice, and overall quality of democracy – and it therefore needs to attend to this correction of these neoliberal-minded ‘rules of the game’.

One clarity, straightaway and much-needed, that this revision of the ‘rules of the game’ will provide government is with regard to enhancing the inflation target from 5-7 percent to much higher, both because of the existential threats related supply-side shocks, and also time to transition from the current economic shape to one that is more resilient, and technologically advanced enough to absorb much-better the enormous changes a world of artificial intelligence (AI) is bringing. In revising this ‘rule of the game’ will also give better perspective to SBP in terms of determining the speed, and depth of its monetary policy tools along with first a very different lens in the shape of non-neoliberal economic philosophy to look at inflation. Hence, a higher inflation target will be fed into the policy framework or ‘game’ of SBP, through the pathway as provided in Section 2, clause (kb) of the current ‘State Bank of Pakistan Act, 1956’as follows: ‘“price stability” means the maintenance of low and stable inflation guided by the government’s medium-term inflation target’.

As a serious criticism of successive governments, this correction has indeed been long over-due, and moreover, such correction is not only need for the SBP, but also for the fiscal policy as well, along with environmental, and epidemiological policies, which all need to be readied to effectively deal with the existential threats facing the country as well. It is only after that these rules have been fixed that SBP’s conduct of monetary policy can come under greater scrutiny, which is not to say that any serious criticism of SBP’s own tilt towards neoliberal policies will not be warranted, given SBP’s board of directors, or monetary policy committee (MPC) have not reportedly raised any concern against neoliberal policies, especially in terms of misgivings of over-board austerity policies towards overall macroeconomic stabilization, economic growth, and resilience.

Overall, while there is a need for organizational independence of SBP, which the current ‘State Bank of Pakistan Act, 1956’ provides overall, there is a need to strengthen the say of government – in addition to SBP being answerable to parliamentary oversight – in ensuring that the ‘rules of the game’ are being adhered to by SBP.

Firstly, while finance secretary is rightly a member of board of directors of SBP, he should also have a right to vote to better serve the purpose of much-needed greater transparency of government — an important pillar of central bank independence — for the economic agents as to what is the stance of government on a certain monetary policy, or overall monetary sector related matter.

Secondly, the matter of coordination between government, and SBP stands on rather vague, and loosely worded grounds in the current ‘State Bank of Pakistan Act, 1956’, as indicated in section 9G of the act as follows: ‘Governor and Minister of Finance to establish liaison.- The Governor and the Finance Minister shall establish a close liaison through a mutual agreement with each other and shall keep each other fully informed on all matters which jointly concern the Bank and the Ministry of Finance.’ The government is indeed at fault in not defining any framework of the platform for such important interaction in terms of known schedule of meetings in this regard, the public announcements on discussions held – once again for bringing greater transparency, and predictability for economic agents, including for the purpose of enhancing economic predictability, and for providing a bigger pool of information for demos to decide about the performance of government in elections –and the hierarchy of SBP, and government representatives present in the discussion as part of the ‘rules of the game’.

Last but not the least, the presence of the revised ‘rules of the game’ away from Neoliberalism – where the ‘rules of the game’ include a more receptive mechanism to allow for much greater reflective attitude by government and SBP – working as governing framework/environment for economic policy, including monetary policy, it will not only have provided much-needed economic institutional quality for the economic organizations, including SBP, to play a more meaningful ‘game’ or role, and in reducing both transaction costs for economic agents, and for allowing to reach much-better productive, and allocative efficiencies in terms of prices, and value, it will also allow economic authorities to have greater clarity, sense of purpose, and strength of argument in negotiating with IMF.

Copyright Business Recorder, 2025