Seminar In Economic Policy

8/7/2019 Seminar In Economic Policy

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SEMINAR IN ECONOMIC POLICY

Presentation Topic

Implications of CentralBank Autonomy for

the Developing World.

Presented by:

Hina Muhammad Yaqoob

5837



PRESENTATION FORMAT

Brief Intro to the Authors

Introduction to the State bank

Relationship with the government

Central bank autonomy theory

Implications of central bank autonomy

Conclusion



Excerpted from the book

Money and banking in Pakistan

By: S.A Meenai

Revised by : Javed . A Ansari

Presentation from chapter 13



A UTHORS· INTRO

S.A Meenai

Former deputy governor of the state bank of

Pakistan and Vice President of the IslamicDevelopment Bank Jeddah.

Member of several national commissions andrepresents Pakistan at a number of international

conferences



A UTHORS· INTRO

Javed A Ansari

Held different posts at United Nations Industrial

Development Organization, United NationsCentre on Transnational Corporations, National

Bank of Pakistan and Allied Bank of Pakistan.

Presently he is dean and professor of Economicsand Finance at the College of Business

Management, Karachi and advisor to the

Federation of Pakistan Chambers of Commerce

and Industry.



STATE BANK OF PAKISTAN

Central Bank of the country

Objectives:

Regulate the banking system.

Operate an independent monetary policy.

Set limits on government borrowings from the State Bank.



STATE BANK OF PAKISTAN

Amendment act of the 1956

´while the state bank may advise the government,

the government may not longer advise the state

bankµ



CHRONOLOGICAL HISTORY OF STATE

BANK

1948-1956 -monetary stability.

1956 ² 1972 -concerned with stimulatingdevelopment. promoting long term investment inagriculture and industry.

1974 state bank·s operational mandate wasradically changed.

1988-lost control over money supply. Creditplanning abandoned, mounting public debt,

uncollectible bank debt. In early 2000-inflow of foreign resources, rupee

stabilized and interest rates fell. Consumerfinancing soared and fixed investment growthstagnated.



DEC 2005- severe inflationary pressures

in FY 2008 -growth surged and several major

banks faced a severe credit crunch. Foreignreserves were halved and during July-November

2008 the rupee depreciated by almost 25%. A new

medium term agreement was signed with the

IMF.



RELATIONSHIP WITH THE GOVERNMENT

Formally the government exercises control over

the state bank.

appoints both the governor and deputy governors

nominates all the directors.



EXAMPLES OF INCREASING CENTRAL BANK

AUTONOMY

During 1993 -1999 the legislative framework forenhancing state bank autonomy had been put inplace. SBP governor Yaqub appointed ArthurAndersen a British consultancy to redesign the

bank and branch supervisory.

In 1999 appointment of Ishrat Hussain. exemployees of global agencies were appointed asSBP officials

in late 2008 retaining an IMF nominee asgovernor of the state bank and curtailinggovernment borrowing from the SBP



IMPLICATIONS FOR STATE BANK

AUTONOMY

The IMF and the world bank placing an

increased emphasis on financial sector reform in

developing countries.

enhanced central bank autonomy is a means for

imposing the authority of international financial

markets.

reducing their capacity to resist subordinated

integration.



THEORY OF CENTRAL BANK AUTONOMY

Central objective pursued by neo-classical

monetary theory is to eliminate inflation.

It becomes completely focused on the objective of

offsetting and destabilizing capital inflows and

outflows

Central bank independence has been found to

reduce inflation in industrialized countries only.



QUESTIONS UNANSWERED

The theory cannot answer the following questions

Why the sole objective of monetary managementbe price stability rather than equitabledistribution of wealth?

How can state bank be reconciled withdemocracy? accepting autonomy means accepting

dictatorship of technocrats.

Why is international financial instability notbeing reduced despite increasing autonomy?



IMPLICATIONS;

Central bank should be a banker·s bank:

Principal creators of money are the deposit

taking banks.It must act to prevent the crises that emerge if

expectations remain massively unfulfilled

the scope level and form of the activities are

circumscribed by SB·s commitments to continuedcommercial bank solvency and profitability



THUS,

In a mature capitalist system is it the profit

maximizing deposit taking institutions which

rule. The central bank is merely an instrument

for making this rule possible



CENTRAL BANK IMPLICATIONS

An instrument for the purpose of transfer of

sovereignty from the third world national

governments to the issuers of hard currencies

and international financial markets.

It ensures that this country will not be able to

pursue policies which undermine the strength or

limit the scope of dominance of the hard

currencies issuers ( especially the US).



THUS,

The autonomous central bank becomes an

instrument for imposing the will of the dominant

political forces within the metropolitan states

and market systems of the metropolitan

countries themselves.



CENTRAL BANK AUTONOMY IMPLICATIONS

The central banks of highly developed countries

are normally less autonomous than central banks

of countries which do not issue hard currencies.

This is because the viability of the global

financial system depends crucially upon the

political stability and continued dominance of the

issuers of hard currencies especially the United

States.



CENTRAL BANK AUTONOMY IMPLICATIONS

Disappointing experiences with the Euro shows thatwe are nowhere near the development of a worldcurrency or a global lender of last resort despite thecontinuing weakening of the dollar, the supremacy of the US dollar is as yet unchallenged



THUS,

A safety mechanism:

They act on behalf of the American federal

reserve and of international financial markets

and continue to function as shock absorbers and

turn their countries into places where riskierexperiments can be undertaken with relative

immunity for global capital.



CONCLUSION Banking sector reforms focused on enhanced central bank

autonomy have now become a key feature of world bank andIMF structural adjustments packages

The SBP needs to be autonomous within the government andnot from the government.

A country which accepts an autonomous central bank isessentially a country that is accepting monetary slavery. A country cannot progress if it·s a slave to other countries.

Seminar In Economic Policy

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