SBP autonomy

The autonomy bestowed on the State Bank of Pakistan (SBP) by the last government was riddled in controversies from the word go – and now that the new government is in the driving seat it has started drawing heavy fire even from what some would argue are quarters not too relevant. The central bank and its governor, Reza Baqir, a former IMF executive, have suddenly found a staunch critic in the form of the PML-N’s Khawaja Asif, the country's new defence minister. Since Khawaja Asif has already brought the matter up – and some have wondered whether he should have – now may be as good a time as any to review the SBP autonomy controversy. The autonomy of a central bank in any country is a matter of utmost complexity. All countries have their peculiar circumstances and constraints while deciding about the level of leeway they can give to their apex banking authority. For loan-reliant countries like Pakistan, the matter of autonomy is inextricably linked with the terms and conditions of international financial institutions (IFIs).

When the PTI-led government struck a deal with the International Monetary Fund (IMF) for bringing its $6 billion loan back on track, it came with long strings attached with it for the IMF to pull. Part of the strings attached was the IMF's wish for Pakistan to grant an autonomous status to the SBP. Perhaps the government could have negotiated a better deal but it acquiesced. Amending the SBP Act 1956 was not insignificant; the government introduced a new law: the SBP (Amendment) Act 2021, which was passed in an controversial a manner as it was received, the opposition at the time saying it had been bulldozed through by the PTI government without giving any time for debate. The law gave the central bank unprecedented autonomy. Ostensibly, it was a move to ensure price stability and accountability, but independent economists saw the amendment in the SBP law just to meet the IMF’s conditions as surrendering the country’s sovereignty to the lender of last resort. However, one must keep in mind that a country’s economic sovereignty depends to a large extent on how much it owes as foreign largesse and loans. It is true that Washington is the biggest investor in the IMF, and it is also correct that Pakistan itself rushes to it for bailouts.

At the moment, Pakistan has a lot of stakes in the already-negotiated deal with the IMF, otherwise the new finance minister would not have landed in Washington to give a shot at getting the stalled loan agreement going. Although Khawaja Asif's statement regarding rethinking the SBP autonomy law has found its supporters, there are many who say that – much as the SBP law from 2021 is controversial in that it ends up making the SBP an unaccountable entity – at the moment reversing the law could complicate things for the new government. Perhaps the new government could first cut a deal with the IMF and then try to strengthen the economy to a level where it doesn’t have to turn to a multilateral lender to avoid going bankrupt. For now, the economy remains in the choppiest of waters and may not come out of it for a couple more years at least.