Why they fear an autonomous SBP

In an earlier article (‘The poor state of the State Bank’, February 1, 2014), I had criticised the PPP government for appointing commercial bankers as governors and deputy governors of the State Bank of Pakistan (SBP). It was hoped that the PML-N government would be more prudent and appoint those people in the SBP who are qualified to hold those vital positions in order to revive and revitalise the SBP as a professional, autonomous and effective central bank.

The finance minister made a public commitment to select candidates for the vacant positions of the governor and the deputy governor ‘on merit’. The first requirement to fulfil such a commitment was to understand the difference between a commercial banker and a central banker, and the qualifications/experience required to fill the positions of the governor and deputy governor. He should have known that commercial banking is a totally different profession than central banking and requires different expertise and experience.

If there was any doubt or confusion, the minister could review the guidelines given by the Central Bank Governance Forum of the Bank for International Settlement (BIS) or look at the qualifications and experience of governors and deputy governors in countries where central banks are functioning effectively.

The SBP is legally mandated to perform two critical functions – conducting an independent monetary policy and regulating the banking system. The monetary policy must be geared to control inflation and channel commercial banks’ credit to productive economic activities to facilitate economic growth. The regulatory framework has to be developed and enforced on the banking system so as to safeguard the interests of depositors, ensure liquidity, solvency and profitability of banks and avoid systemic risks.

In today’s national and international setting, in which the concept of money is changing with the use of technology and creation of new financial derivatives, formulation and conduct of monetary policy is a difficult and sophisticated task. Even an economist, who is not especially trained in money and banking matters and intricacies of monetary policy, would find it challenging to effectively lead the SBP as its governor.

It is almost impossible for a non-economist to guide the SBP in the formulation and implementation of an effective market-based monetary policy as defined in sections 9A, 9B and 9C of the SBP Act. Moreover, in the face of the qualifications and experience of the governors of other central banks, an unqualified governor of the SBP is likely to cut a sorry figure in interacting with them both bilaterally and in international settings.

The task of banking supervision requires both sound understanding of the modern principles of bank supervision and awareness of the work being done on almost a daily basis by the BIS, particularly the Basel Committee for Banking Supervision, Financial Stability Institute, the IMF and other international agencies creating new frontiers of banking supervision. Commercial banks have a tendency to indulge in excessive risk taking to make profits and the central banks have to have expertise and regulatory framework to keep them in check. Such expertise cannot be expected from commercial bankers.

Contrary to adopting a merit-based approach, the PML-N appointed a deputy governor who was a junior-level commercial banker possessing none of the qualifications needed for the job and with no exposure or experience of working in the central bank. In addition, it appointed another commercial banker as acting governor of the SBP. Now there are press reports that the government is likely to appoint another commercial banker as governor of the SBP.

These choices are in some ways worse than those of the PPP-led government. For example, the appointment of Yaseen Anwar as the governor of the SBP by the PPP government was widely criticised but at least he had acquired central banking experience as a deputy governor for about five years before he was moved up to the position of governor SBP.

Commercial bankers with no training in monetary economics and no experience in central banking would have to be educated by the SBP’s professional economists about the role and responsibilities of the SBP in the conduct of monetary policy. But the ability to articulate policy and the courage and conviction to take proper policy decisions cannot be taught and can only come from the depth of their own understanding of the complexities of monetary management. Such a management, instead of leading the professional staff on the right path, can become drag them down.

The question that comes to mind is why both the PPP and the PML-N governments have refused to abide by the State Bank Act as amended in the 1990s and appoint competent SBP governors/deputy governors who could ensure formulation and implementation of an independent monetary policy based on professional considerations as well as regulate the banking system to best serve the national interests? The answer is simple.

Both the governments have failed to tax the rich and reduce wasteful government expenditure and have been in need of borrowing to finance the wide budget deficits. An autonomous SBP run by a competent management team would refuse to print excessive currency notes to finance budget deficits and also stand in the way of pre-emption of commercial bank credit by the government so that it flows to the private sector to finance investment and promote economic growth.

In other words, an autonomous SBP under a competent and courageous management will compel the government to abandon the easy path of excessive borrowing from the banking system to finance budget deficits and make it necessary for the government to undertake tax reforms to expand the tax base and bring the rich and powerful into the tax net. Such a compulsion is politically unacceptable to those in power. Accordingly, they have adopted the easy way out by keeping the SBP under its thumb by appointing subservient and incompetent people as its governors and deputy governors.

With raw and weak hands at the helm of affairs at the SBP, the Ministry of Finance effectively becomes in charge of the monetary policy having easy access prinint notes and commercial bank credit to finance budget deficits. The government is least bothered that such a course of action violates the law, accelerates inflation, increases the vulnerability of the banking system, promotes income inequality and poverty, retards economic growth and drives the country towards a debt trap. Similarly, a competent SBP management would not allow the government to interfere in the banking business and make it difficult for the government to get away with loan defaults or state-sponsored credit schemes motivated by political considerations.

An autonomous SBP, headed by a competent and courageous governor and assisted by professional deputy governors, will not be a state within the state, as wrongly alleged by some politicians, but a strong deterrent against the misuse by irresponsible governments of the banking system to avoid tax reforms.

Those who ask as to how a democratic country can give power to an unelected institution over an elected government are reminded that democratic countries like the US and Germany have chosen to do that in the larger economic interest of their countries. They have also placed checks and balances by having a non-elected judiciary deterring governments from misuse of their authority. Thus there is no contradiction between the autonomy of the State Bank of Pakistan and a democratic system of government.

The writer is a former governor of theState Bank of Pakistan. Email: doctoryaqub@hotmail.com