THE State Bank of Pakistan (SBP) is one of the premier national economic institutions legislated to play a key role in macroeconomic management, control on inflation, conduct of monetary policy and development and supervision of a sound and stable banking system.

A large part of the blame for the present financial indiscipline in the public sector, a high rate of inflation and a slow rate of growth of the economy falls on the shoulders of the SBP, particularly keeping in view the statutory authority it has since 1997 to “determine and enforce” the limit on government borrowing from the SBP for all purposes, and at all levels of the public sector.

In its history since independence, the SBP has gone through many ups and downs in the performance of its vital central banking functions but has never been as ineffective in national economic and financial matters as it is today.

Prior to the legislative reforms of the 1990s, and in spite of the de jure limitations under which they operated, several SBP governors tried to perform central banking functions with determination and professionalism.

Even when most of them were not economists by training or central bankers by experience, those governors had a basic grasp of macroeconomic policies as well as vast experience in macroeconomic policymaking. Therefore by the sheer weight of their stature and experience they played a key role in economic management.

Zahid Husain, the first governor, laid solid foundations of the SBP both because of his technical competence and his personal standing. Abdul Qadir, S.A. Hasnie, A. G. N. Qazi and Ghulam Ishaq Khan who followed him consolidated the professional base and standing of the SBP, and were able to effectively contribute to macroeconomic management.

V.A. Jafarey and I.A. Hanfi lost their jobs trying to insulate the SBP from day-to-day government interference in its functioning and policy differences.

With a worldwide recognition of the importance of the autonomy of a central bank for macroeconomic stability and control on inflation, and with a deteriorating economic and financial situation in Pakistan and increased interference by the ministry of finance in banking matters, the need for a legally autonomous and operationally assertive SBP was realised very acutely in the 1990s.

Accordingly, beginning with Moeen Qureshi’s interim government in 1993, the subsequent governments supported a reform programme for the SBP and took several legislative measures to strengthen its legal foundations for the conduct of an independent monetary policy which was believed to be a precondition for control on inflation and for improvement in financial intermediation in the country.

In 1994, the Benazir Bhutto government passed a legislation to provide protection to the tenure of the SBP governor and to make the SBP administratively autonomous. In 1997, the Nawaz Sharif government empowered the SBP to “determine and enforce” the limit on government borrowing from the SBP for all purposes on monetary policy considerations, and made the SBP the sole regulatory authority over the banking system.

An institutional and procedural framework was agreed between the government and the SBP and put in place during 1997-99 for implementation of these reforms.

However, the new legal framework and institutional arrangement for monetary policy formulation and implementation were pushed aside during the Musharraf era, and the SBP lost in practice what was gained through legislative and institutional reforms.The situation by now is worse than what it was before the banking reforms of the 1990s.

There is a de jure autonomy of the SBP which is frequently mentioned by the government as well as the SBP in their publications and public statements, but the de facto situation is that the SBP has surrendered its de jure autonomy and subordinated monetary policy to the dictates of the fiscal authorities.

At present, the monetary policy is not framed on the basis of the amended SBP Act. The SBP willingly lets the government print notes or borrow from commercial banks beyond safe limits, fuelling inflation, crowding out the private sector and stifling economic growth.

The SBP has also organisationally fragmented itself by creating two independent statutory bodies called the SBP and the Banking Services Corporation (BSC), the former dealing with monetary policy and bank supervision and the latter with operations. The two have their own separate legal status with independent chief executives and legally separated staff.

There are not many central banks that have organised themselves in this fashion because polices and operations are intimately interconnected and the staff experience in both the areas would make it most effective and cohesive.

Moreover, the position of the deputy governor (policy) has not been filled for almost a decade and deputy governors on the operational side have been ‘imported’ from outside with no training in central banking and no institutional memory to rely upon.

The SBP has also weakened its grip on the commercial banks that look more towards Islamabad than the SBP for signals and guidance in managing their affairs. The banks, operating under the SBP’s weak regulatory authority, have been fleecing the depositors as well as borrowers while the shareholders have been minting money and senior commercial bank executives getting hefty compensation.

The governance structure of banks remains primitive and banking supervision does not focus on macro indicators of risks and measures to avoid systemic problems.

In short, the SBP does not currently adhere to its own legal charter in the conduct of monetary policy, it has no control over its own balance sheet, has taken bank supervision in a wrong direction, its internal organisation has become fragmented and inefficient and it plays second fiddle even in matters falling in its own exclusive jurisdiction.

Revitalising the SBP and the latter’s re-emergence as a powerful and effective central bank is a prerequisite for addressing the current depressing economic and financial problems of the country.

The writer is a former governor of the State Bank of Pakistan.