By Arshad Zaman -:
From reports in the press, the State Bank of Pakistan Amendment Bill, 2021 seems to be an Enfield rifle, greased with pig fat that the nation will be asked to chew on. If we do not act to stop its passage by parliament, by whatever it takes, then we can say farewell to a free and sovereign Pakistan. This may well be our 1857 moment.
The State Bank is the financial agent of the government and is the banker to all banks. As the banks’ banker, it regulates and intervenes in the market for money (rupee and foreign currencies). As the government’s bank, it holds public funds and lends to (or withholds money from) the government, when it is needed.
It is the government’s credit card. Just as a parent takes away the credit card of a teenager who misuses it, the IMF has finally succeeded (after some three decades of persistent efforts) in persuading the government to surrender its credit card. To whom? Not to the people of Pakistan, to whom it belongs in a democracy. But, following the by now well-established practices of servitude, to a State Bank management, nominally appointed by government but substantively by the IMF.
The case for an independent central bank is both political and economic. The central problem of politics is the establishment of a just government, under law that answers and caters to all the people. Unlike England and America, we have failed at this. Yet, we tend to mimic their practices, without realising that we don’t possess the institutions that enable their success in those countries. There, the centuries-old customs of the people, embodied in common law, were finally established by beheading a king who held himself above the law (Charles I, 1649) and fighting a war to stop paying taxes to a foreign power (the American Revolution, 1775-1783).
In Pakistan, instead of the rule of law, the law of the ruler prevails. Moreover, having stepped into the shoes of the British, the ruling oligarchy regards the people as inferior aliens, and all politics is a catfight over the diminishing spoils of tyranny. Democracy in Pakistan is lawless rule, over the people, by an oligarchy, for its bankers. This is the fundamentally different reality which can make what is good for England or America, disastrous for Pakistan.
In England and America, those for and those against central bank independence can both assume that there is an infrastructure of law and parliamentary oversight that restrains both the central bank and the government from acting against the public interest. The debate on central bank independence is therefore a debate on whether, additionally, the public interest is better served by parliamentary or by governmental oversight of the central bank. This isn’t the case in Pakistan, where if the government does not oversee the State Bank, then no law or authority can hold it accountable.
Our political problem is that we haven’t been able to make any laws that can restrain the powerful. Members of parliament, instead of looking after the people they ostensibly represent, seek to enrich themselves and emigrate abroad. The pickings are so good that they have recently passed a law allowing foreign (dual) citizens to represent the people of Pakistan. Like the rest of government, the commanding heights of finance are all occupied by individuals who aren’t accountable to the people and will be on a plane out of the country at the sound of a loud firecracker.
In this situation, the fact that representatives of the people must periodically seek votes to get elected is the thin string by which hangs the semblance of tolerable government. The amendment proposes to slice this string further by placing the State Bank beyond effective accountability to the people. This would be a giant political step backwards.
What about its economics? The economic case is made in two steps. First, the case is made that the government, by forcing the central bank to finance excessive budget deficits, creates inflation (which undermines monetary stability and sustainable growth). Second, it is argued that this problem can be solved by granting independence to the central bank. This is bad economics as well.
While excessive government spending does contribute to inflation, two things are true in Pakistan that aren’t in England or America. One, it is interest payments on domestic and external debt that are the largest and fastest growing component of government expenditure. They will not be contained by making the State Bank independent (nor, by raising interest rates). Two, it isn’t excessive government demand for goods and services that is causing inflation. It is being caused by rising import prices, shortages of production capacity and supplies, and by monopolies and oligopolies in key markets. Will an independent State Bank lead to lower sugar prices or electricity tariffs? It is the wrong solution, albeit for the right problem.
It isn’t just bad politics and wrong economics to make the State Bank autonomous of law and government, it is also a national security risk. The government does waste money; but from time to time, it must also incur unavoidable expenditures of the highest priority. In times of peace, does it help that the government’s external reserves and revenue receipts are held by an institution that monitors the government’s financial transactions for foreigners, by explicit agreement? And if war is thrust upon us, would we be able to defend the country better when the entire top financial management of the country would have flown out to their actual homes abroad at the first sound of gunfire? Think about this.
The problems that central bank independence seeks to address must be solved on a priority basis. But both logic and experience demonstrate conclusively that the generic, one-size-fits-all solution proposed — central bank independence — will not work. We all know it won’t work. It would only formalise in law our quasi-colonial debt-servitude, which is the real problem. If the government doesn’t withdraw the legislation, then common citizens must fight to stop it or say farewell to Pakistan. It really is now, or never.
(The writer has served as a senior economist with the World Bank and as the chief economist of the government of Pakistan)
Source: Business Recorder, 2021