Pakistan’s Monetary Policy: Some Fundamental Issues

Author: Zafar Hayat
JEL Classification : E5, E52, E58
Publication Year : 2017

Over the last three decades, the landmark transformation of central banks from secrecy to openness and transparency has significantly enhanced their performance to successfully anchor inflation expectations and achieve price stability. The extent of such a transformation of the State Bank of Pakistan (SBP), especially in terms of statutory objectives, monetary policy mandate, conflicts of interest, disclosures, and dissemination of effective public economic information is assessed vis-à-vis the current popular central banking practices. The assessment indicates that the SBP is yet to be transformed to be able to achieve price stability which is a cornerstone for the achievement of sustainable economic growth. On the statutory front, such a transformation requires amending the SBP Act 1956, in line with the statutes for the best monetary policy frameworks by; (1) making price stability as the overriding objective of the SBP; (2) putting in place a clear mechanism for its accountability against price stability, consistent inflation targets, and; (3) elimination of the cushion for government‘s involvement with the monetary policy decision making processes. Some of the other areas like, institutional capacity building of the SBP, in terms of the relevance and level of the academic qualification, research profiles, and experiences of the Board, higher as well as lower tier management need special attention. Such transformations may not only enhance assimilation, creation, sharing, and funnelling of existing as well as new knowledge into monetary policy formulation, but may help change the static mindset at the SBP, hence allowing the institution to flourish.