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There was a news item that government (read ministry of finance) seeks to clip wings of SBP Governor. The story should rather be to develop Ministry of finance (MoF) wings. On independence of SBP, the PMLN’s finance czar (Dar) while in opposition once said that making SBP independent is like making state within a state when the autonomy of SBP was in question. But he never really worked on building MoF’s fiscal policy making capacity.

One needs to understand that SBP and MoF both are organs of state, and there is no way SBP can be independent of government. The institutional desire is to attain independence from MoF, not government. The problem is that the ministry of finance wants everything under its control.  It has already in the past clipped the wings of Planning Commission, which once used to be a central planning body independent of MoF. Now nothing moves without the consent of Q Block. But the fiscal division is not independent from the influence of political and other shenanigans.

Political and businesses interventions through MoF have over the period of time destroyed planning institution. There is no accountability of fiscal division. No one has never really made them answerable to deviating from the budgeted numbers which has become a norm. No one never asked them that why their assumptions are mostly out.

The SBP independence was never liked my those sitting in Q block. Even in days of a powerful president, a strong headed SBP Governor used to have calls from Islamabad on lowering interest rates, but that Governor did not give much heed to these. Subsequently, a few years later, SBP Governor(s) were (almost literally) acting to MoF advise. Even some sound economists internally used to refuse tweaking statements. That is why at many occasions in past, monetary policy statement wording and decisions were poles apart. Now when SBP is giving a clear signal to the market and refusing to take dictation, the question of autonomy is raised again.

Power to determine monetary and exchange rate policies oscillated between SBP and MoF for a few decades. It is like moving three steps ahead and two backwards. One may hope that it is slowly moving in the right direction. The real problem of balance is that MoF never acted beyond managing fiscal accounts. The control of Q block is with generalists having non-economics background. With specific training, they can manage fiscal accounts; but forming and managing vibrant fiscal policy is a different ball game. That needs a battery of economists and analysts in ministry with decision making abilities. That had never happened.

At many instances, MoF ask SBP to form assumptions of fiscal policy and these numbers are presented in fiscal and monetary policies coordination board and in other forums. Most of the time, in the past 3 decades, the country has remained under IMF programme and the fiscal policy is being designed by the Fund team. Now to have an active coordination board (which it should be), MoF has to gear up to earn it.

Another question raised in the story is of separation of powers of chief executive (Governor) and chairman of board in light of good corporate governance practices in the world. It is naïve to compare the best practices in private sector to public sector institutions. Independent monetary experts are of the opinion that sitting Governor should assume both positions. World over, central banks have clear mandate and are powerful within it. Pakistan should not be an exception. The need is to have a formal structure of accountability. The governance structure can improve by forming effective formal committees with recording of minutes and making committee decisions considerations binding.

Having said that, MoF should be engaged in decision making where required. For instance, Secretary Finance should be member of the SBP Broad, but not a part of the Monetary Policy Committee. The MoF is the biggest client of banking system, how can it be making decision of monetary policy?

There should be internal and external committees in key decision making. In past SBP Governors used to take input from internal teams on exchange rate and other key decisions, but these have always remained informal. That has to change. Minutes of these recommendations and suggestions should be presented to monetary policy committee and other external bodies to have inclusive decision making.

In developed economies like Canada, such meetings schedules are prepared in advance for 2-3 years. In Pakistan, things are never clear till the last moment. Such as meeting of fiscal and monetary policy board. This is not the first time such board is inactive or meetings schedule has kept on changing. That had happened many times in past.

Earlier it was done by the Finance Minister, now the Governor SBP is flexing muscles. Some say Pakistan is transiting from fiscal dominance to monetary dominance in policymaking. The equilibrium is missing. That is true to an extent, but for regaining its power, MoF should build its fiscal policymaking capacity, rather than using health crisis to dilute the SBP power.