Recent developments at the State Bank of Pakistan (SBP) should serve to bring focus on the current monetary policy and its effect on private sector investment, the crucial driver of the economy. The high interest rate regime and continued large government borrowing amid high inflation are indicative of inability of the regulator’s hierarchy to assert its autonomy on the finance ministry. First of all, the importance of the monetary sector’s chief regulator to not only be independent, but also clearly appear so, cannot be stressed enough. Unfortunately, our policy makers have failed to develop a culture of appreciation for constructive criticism, reflecting short sightedness that will have to be overcome for the economy to incorporate innovations.
It bears noting that during my time at the finance ministry, we fiercely encouraged and defended the state bank’s independence. The governor of the time would vouch that we deliberately introduced the culture whereby the finance ministry learnt of the central bank’s policy statements upon announcement only. We need to strengthen the system which compels the centre itself to safeguard regulator-autonomy across sectors, stressing that while governments come and go, monetary direction is long-term and must be protectedpreserved.
The next most crucial element is the monetary policy’s interface of inter-dependence with fiscal policy. In the recent past, the monetary sector has been unduly burdened with creating balance because fiscal policy has not been responsibly crafted or and implemented. Resultantly, undue government interference in the monetary sector has harmed the common man, crowding out private investment and subsequently retarding the economy. With unnatural government demand for central bank credit, monetary policy options have narrowed too much to accommodate a proactive posture needed to stimulate growth and employment.
Currently, the state bank is embroiled in a pressing debate regarding interest rates. As things stand, contractionary measures have been unable to arrest rising inflation because of excessive government debt monetisation. Also, with few signs suggesting sobering of the relentless borrowing, there intent of the interest rate regime has been diluted, the only effect being drying up of credit markets for the private sector. In such situations, fiscal hawks warn of inflationary pressures arising from easy monetary policies, pointing at repeated instances of hyperinflation running amockamok in Brazil, Turkey, Germany, etc. Yet there is an urgent need for both reducing government presence in money markets and reducing the cost of credit for the private sector.
The right balance is found in a complementing fiscal policy. In times of downturns, when monetary policy is compromised (as in Pakistan’s case), it is prudent to incorporate a targeted expansionary fiscal policy. The government should identify areas where targeted investments can initiate uplift and infrastructure-upgradation projects, while providing short-to-medium term employment opportunities, encouraging consumerism and ultimately stimulating second-round multiplier and overall growth. In the present political environment of an often unnerved coalition government, identifying and initiating such fiscal stimuli will test the government’s political will.
Once credit markets are unstrained, putting downward pressure on inflation, both monetary and fiscal authorities must immediately tackle the fiscal deficit and control runaway debt. The debt management cells of the ministry of finance and SBP must consolidate efforts to manage it, especially local currency borrowing. Initially, they must innovate and restructure the maturity profile of the debt, which is 2.5-3 years for Pakistan, approximately 5-6 years in India and 8-10 years in most other countries. This period should be increased to accommodate more innovations in subsequent policies.
Presently, monetary policy is simply ineffective. As long as the government keeps borrowing from the central bank, and the latter is unable to assert its autonomy, private sector participation will remain strained, and the economy will be unable to snap out of the low-growth high-inflation stagflationary cycle.
The writer is a former finance minister