Sovereignty lies with IMF: International Best Practices and End Goals
SBP is running monetary policy based on vibes only
SBP’s monetary policy statement came out today. It was followed by SBP Governor Reza Baqir going on Shahzeb Khanzada show to explain his MPC’s stance. I have covered earlier (SBP’s 5th Generation Warfare and SBP’s Fifth Generation Warfare: Part Deux) how SBP under Reza Baqir is dialing up the media appearances as shown below:
Nov 19: RB interview to Kamran Khan
Nov 20: RB interview to The Profit
Nov 23: RB interview to FT
Nov 23: RB pens Op Ed for Dawn
Nov 24: RB interview to CNBC
Nov 29: SBP now issues “clarification to dispel misinterpretation circulating in certain sections of the media about previous monetary policy decisions”
Dec 6: Deputy Governor Murtaza Syed pens an Op Ed for Business Recorder
Dec 14: Governor RB goes on Shahzeb Khanzada show to explain Monetary Policy Statement.
Uzair didn’t like this as parsing the monetary policy statement alone is hard enough (a substack post on it in future insha Allah) and now one has to interpret the signals given in TV interviews and op-eds by SBP officials.
One can sympathize with people whose livelihood depends on it.
Personally, I want the Governor and Deputy Governor to increase their media appearances. Where else am I going to get “content” for this substack?
The aforementioned was a digression. Coming back to the monetary policy statement, there is this line in the statement
the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved
Zuhair picked up on something that I missed in the above statement.
The point I want to focus on in the statement is
end goal of mildly positive real interest rate
Who decided on this “end goal”? When and where this discussion with respect to goal setting was held?
Another slight digression.
When earlier SBP decided to increase the monetary policy meetings from 6 to 8, it cited “international best practices”. The editorial in BR thought otherwise.
Under the amended Reserve Bank of India Act, the Monetary Policy Committee (MPC) is required to meet at least four times a year, in Bangladesh once every month or at least once every quarter, and the US federal open market committee holds eight regularly scheduled meetings during the year and other meetings as needed. The key words in holding more frequent MPC meetings must be ‘as needed’ and to claim that the process of monetary policy formulation would be more predictable and transparent in line with international best practices simply by adding on two more meetings a year is inexplicable.
Inexplicable. Hmm…
One can almost sympathize with BR and the tweeps who now not only have to parse the increasing number of monetary policy statements but also read op-eds and watch interviews before and after the monetary policy statement to understand what is the central bank thinking.
Talking of international best practices, this is how the Federal Reserve describes its mandate.
The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together. As a result, the goals of maximum employment and stable prices are often referred to as the Fed’s “dual mandate.”
The Federal Reserve didn’t come up with its mandate itself. It was Congress that assigned the mandate to the Federal Reserve.
Bank of Canada gets a five-year mandate from the Canadian government to pursue the targets.
Bank of Canada’s new mandate comes with one wrinkle: politics
The renewal of the Bank of Canada’s mandate agreement with the federal government grants the central bank a five-year licence to, largely, continue doing what it has already been doing.
After years of research and consultations by the central bank, and months of back and forth with the Finance department, the two unveiled a deal on Monday that left the bank’s core mandate unchanged. It will continue to use monetary policy – chiefly, interest rates – to pursue an inflation target of 2 per cent, the midpoint of a 1-per-cent-to-3-per-cent range of tolerance.
At the same time, Finance Minister Chrystia Freeland and Bank of Canada governor Tiff Macklem took a modest but meaningful step to incorporate another priority – “maximum sustainable employment” – into the bank’s job description, while emphasizing that “the primary objective of monetary policy is to maintain low, stable inflation over time.”
Usually, these five-year mandate reviews are a snoozefest – conducted quietly, behind closed doors, and ending with a joint statement that more or less rubber-stamps the status quo. The inflation target hasn’t changed in three decades.
This renewal was different. The bank made its own preparations much more thorough and public, and openly discussed options for altering its mandate. The coincidence of a once-in-a-generation inflation surge hitting at the moment the government was tasked with approving a new mandate turned the discussion into an increasingly hot political topic in the weeks leading up to the final agreement.
Monday’s announcement was not merely the usual release of a joint statement and some accompanying documents, but rather a joint media conference with the Finance Minister and governor – a rare event that spoke to the high profile that this renewal had reached. The end result – with its substantial focus on inclusive employment goals – has unmistakable echoes of the current government’s own priorities.
It’s well short of the “dual mandate” the Federal Reserve has long held, under which the U.S. central bank is formally tasked with pursuing both 2-per-cent inflation and “maximum employment,” with the two goals carrying essentially equal weight. It’s clear in the wording of this new agreement that when push comes to shove, the inflation target remains the Bank of Canada’s No. 1 priority.
That said, it does put the bank’s marching orders on a similar path, if not as far along it. There now is a second, clearly annunciated priority, placed above all others, save inflation.
The bank's five-year mandate expired this year, so Ottawa consulted with experts and stakeholder across the country to see if any changes were needed to adjust the guiding principle that the bank keeps top of mind in making its policy decisions.
Keeping politics aside, if we are looking for best practices, they appear to be
The central bank not only does thorough research but also makes it open ie publishes it.
The government consults experts and stakeholders across the country to see if any changes are needed in the mandate.
Either the legislative branch or the federal government assigns the mandate to the Central Bank.
Let’s look at SBP’s best practices recently.
Everyone finds out from a few pages leaked over WhatsApp that a new SBP Amendment Act is in the works.
After the brouhaha over it in media and social media, the government says that a draft of the proposal can’t be shared with the public and stakeholders before it can be presented to the legislature.
However, the same draft either was shown to IMF or more realistically been drafted by IMF as obvious from the next point.
SBP’s mandate was not only not discussed, however, under the new Act, but the Parliament cannot even amend unless SBP agrees with it, a requirement which is unconstitutional. From Sovereignty lies with IMF
While briefing the International Monetary Fund officials via video link on Monday, he said the provision provides that the central bank would be consulted on any proposed legislation relatable to the SBP.
The legislative power has been conferred by the Constitution on the parliament, and the Constitution does not provide for any consultation with the SBP prior to passing of any legislation, he explained, adding the proposed section introduced a stipulation which was ultra vires of the Constitution.
The legislative power has been conferred by the Constitution on the parliament, and the Constitution does not provide for any consultation with the SBP prior to passing of any legislation, he explained, adding the proposed section introduced a stipulation which was ultra vires of the Constitution.
Though reportedly the draft hasn’t been shared with the legislature or the stakeholders, it was approved by the most competent team i.e., the federal cabinet, without reading.
The federal cabinet approved the SBP Bill on March 9, 2021 but without reading it.
Lastly, no one knows where the stated mandate of “marginally positive real interest rate” came from.
I am but a humble blogger. However, when the excerpts from the draft SBP amendment were initially leaked over WhatsApp, no one on the pro-independence side (with the exception Uzair Younus and needless to say aap ka bhai) inquired what is SBP’s mandate, who decided the mandate, etc. I am not counting the anti-independence crowd, as no one listens to them anyway (I am not saying they should not be listened to. They should. They are equal stakeholders in the economy and are equally affected by SBP’s decisions).
But since SBP is now talking about “international best practices”, it should let us know
1. Who defined the “end goal” for SBP? Was it SBP MPC itself or did it come from IMF?
2. What is the economic theory behind this “end goal” and
3. Does any research provide evidence that this theory is applicable in Pakistan or in current circumstances?
While we are at it, I would also like to know
4. What made the MPC “feel” that the end goal is being achieved?