Are our economic managers flying blind?

OPINION

Babar Nizami

Are our The finance ministry wasn’t amused. The economy is not overheating, they say. It’s just some cost-push inflation. economic managers flying blind? Please let’s just wait it out and in the meanwhile, let us not create conditions (like high interest rates) that will hurt businesses, as well as the government’s own fiscal space. Whichever side of the debate one is, however, it underlines yet again, an issue that we keep coming back to. The lack of statistics with which to prove one’s argument. The Dismal Science is also an inexact science, yes. But our horrible statistics Take, for instance, the issue of whether or not the economy is overheating. As recently as September, the advisor on finance announced that the economy might be departments have made it look like astrology overheating. However, the SBP back then did not see any serious dangers, and was thus not ready to increase the interest rates drastically, which is the usual medicine given to an overheating economy. However, this difference of opinion A disagreement seems to be brewing between the finance ministry and the central bank. Not on whether or not there is inflation – one would have to be a certain kind of overseas supporter of the ruling party to dispute that – but on what is causing it. The lot at Q Block thinks we’re seeing costwasn’t a problem back then since even then the finance advisor didn’t want an increase in interest rates and wanted to cool down the economy through fiscal tools. The advisor and the governor still disagree, but now they have clearly switched sides. Who was right, when? By definition, an economy can be pronounced as push inflation caused by international supply shocks. There are just overheated when, in addition to inflation, it is also at full way too many inputs that we are importing, like fuel, most notably, employment, – which economists describe as 96 out of a 100 that are just too expensive, which in turn, make everything else too people having jobs. Now, whereas the managers of the Amerexpensive. The central bank, on the other hand, feels there’s too much ican economy make their calls using employment figures money sloshing about and some of it needs to be sucked out of circu- provided to them on a monthly basis, their Pakistani counlation to curb it chasing the same quantum of goods and services. terparts have absolutely no usable employment data to rely Unfortunately for the finance ministry, in these two competing on (the last Labour Force Survey was conducted in 2018-19.) views, the central bank’s view involves something under its direct The quality of data is heavily contested in many countries control: the interest rate. And, as we saw on the 14th of this month, but we are not even at that stage yet. Our data is ancient to they hiked it up by another 100 basis points. begin with, hence, completely useless. So what does the SBP do then? The good news is that, before each meeting, the members of the Monetary Policy Committee (MPC) of the central bank are all presented with an exhaustive compendium of statistics by the SBP’s own statistics department. And the MPC does make decisions The author is a business based on that data, including an effort to estimate the output journalist and a media gap, which is considered to be an acceptable alternative to the unemployment number. But professional, presently working the problem here again is that the number crunchers at the central bank mainly rely on as the Publsihing Editor for the GDP number calculated a year ago, and also some other guesstimates that the Pakistan Profit. He can be reached Bureau of Statistics (PBS) working under the Ministry of Planning gives them. via email at babar.nizami@ It is also a fact that the MPC is a sort of a democratic body, containing a rather diverse pakistantoday.com.pk. He set of viewpoints. And we don’t use that word lightly. Not only does it have industry repretweets @Bnizami sentation (which one would assume would always vote for low interest rates), it also has an

MMT proponent in Dr Asad Zaman (MMT folk believe in zero interest rates). And yet, in the latest meeting, when the members were presented with the exhaustive compendium of (mostly old) statistics, all members reached the same conclusion: to increase the policy rate by 1pc. And this isn’t an anomaly. In the last four meetings, for which minutes are available, there was complete consensus in two meetings, while in the other two, decisions were taken with an 8-to-1 majority vote. What does all this mean? It means that though the central bank doesn’t seem to be operating on mere whims, it is still relying heavily on the old statistics it is presented with.

The current governor of the State Bank claims to understand how quickly things change nowadays, and has thus increased the frequency of monetary policy meetings regarding interest rates decisions. But how does he know what has changed every month?

Economics, like the rest of the social sciences, suffers from what is called Physics Envy. It wants its theories to be considered as immutably mathematical as those of physics. It is accused of mathematicising certain arguments more than they possibly should be.

But even those disbelieving matheists don’t recommend not using numbers to begin with. Statistics are the fundamental units with which any argument is made in economics or, indeed, all of the social sciences.

The government is currently moving ahead with some legal amendments to the fundamental nature of what the central bank should be. But perhaps it should be more interested in reforming the Statistics Division. The Pakistan Bureau of Statistics doesn’t need to be reformed, it needs to be completely overhauled. In an era of Big Data and artificial intelligence, our mandarins over at the stats div are still using antiquated methodologies.That too, sluggishly.

NADRA is perhaps a Pakistani success story and, barring delays on high-speed internet spectrum, so is mobile teledensity in the country. These two, combined, could serve as extremely useful tools for the PBS to go about its job. Not just through data mining but also plain, old-fashioned call centres dialing up for data. And perhaps the government could also look into the idea of making it compulsory, with scheduling flexibility, to answer queries and surveys over the phone by the PBS.

The culture of flying practically blind has to stop. There are economic arguments to be made and crucial decisions to be taken. They should be made seriously and with data. What our economic managers are working with is haphazardly collected data using outdated methods. Sketchy data which, to further twist the knife, is also lagging behind by several years. n

By definition, an economy can be pronounced as overheated when, in addition to inflation, it is also at full employment, – which economists describe as 96 out of a 100 people having jobs. Now, whereas the managers of the American economy make their calls using employment figures provided to them on a monthly basis, their Pakistani counterparts have absolutely no usable employment data to rely on (the last Labour Force Survey was conducted in 2018-19.)

The SBP Amendment Act: What’s What Now

A look at the proposed legislation that empowers the central bank and why it might not matter much, or for too long

By Babar Nizami

We’re heading back to the days of The East India Company, the opposition tells us, about the proposed legislation that seeks to increase the autonomy of the central bank. The Company, here, being the IMF at whose behest the upcoming legislation is being passed.

As opposed to general perception, the bit about increasing the tenure of the SBP Governor - and making it difficult to get rid of him - isn’t the main bone of contention for the finance ministry. On the face of it, all governments profess that they want to give a reasonable level of autonomy to the central bank, and this bit doesn’t really clash with that, regardless of how little they might actually want it.

Not allowing the federal government to borrow directly from the central bank is also not too contentious an issue, in fact.

The actual contentious bit relates to the issue that reared its head most recently between the central bank and the finance ministry: the interest rate. The rate, both in theory and practice, is decided by the central bank. But the how is a delicate dance between the SBP and Q Block (a sexier term for the finance ministry), one that involves a power play that spreads out over a number of boards and committees.

Enter: the Board

In this tripwired minefield, it is the proposed dissolution of a pivotal board that is giving a lot of fuel to the rumours of ceding a lot of autonomy to the IMF - through the incumbent Governor, who was allegedly brought in by the Fund to help steward the economy for the current program between the government and the Fund. This isn’t some tin foil hat-wearing local press conspiracy theory. The timing of the incumbent Governor’s appointment and the IMF’s loan program make it difficult not to put two and two together. That board is the Monetary and Fiscal Policies Co-ordination Board. Its job is exactly what it says on the label. Enshrined in the SBP Act, 1955, the board that will make sure that the finance ministry and the central bank take steps in tandem. That the policies aren’t at loggerheads with each other. That the left hand should know what the right hand is doing.

If one were to look at its constitution, however, we get a clear idea of which is the upper hand. Chaired by the finance minister, each of the seven-member Board is appointed by the federal government. In case of a disagreement, the SBP Governor is outnumbered six-to-one.

The proposed legislation seeks to dissolve this Board to replace it with just a head-to-head mutual agreement between the finance minister and the SBP Governor over policy. In case there isn’t an agreement over monetary policy, well, you can’t just get rid of the Governor anymore now, can you?

This really does make the central bank’s position better in the aforementioned delicate dance. However, though the finance minister might have expressed some reservations about the dissolution of the coordination board, he still sits pretty in knowing his ministry’s considerable position over a particular committee.

The legislators, back in 1955, knew that the where-its-at of the central bank was going to be the determination of the interest rate. To that end, the SBP Act lays out the constitution of the central bank’s Monetary Policy Committee. Even if the SBP Governor gets some more equitable footing in the successor to the coordination board, he is all but outnumbered in the MPC.

He chairs the committee, yes, but it’s one-member-one-vote here, even if his is the casting vote in case of a tie.

He can choose an additional three senior executives of the SBP to be on the MPC. That’s four votes in total for the central bank chief. On the other side, however, the lot at Q Block decides three external economists to be the members of the MPC.So? That’s still the Governor’s four versus the finance minister’s three. Well, there are still three members left over. They will all be from - and chosen by - another board.

Enter: the Other Board

The State Bank of Pakistan’s Board of Directors is for the “general superintendence and direction of the affairs and business of the Bank.”

The Board of Directors is generally the most important body of any organisation and though the SBP is no exception, it is the Monetary Policy Committee that trumps its importance somewhat. Not to belittle the BoD, though. It does have considerable powers. But in the context of this article, it is only being mentioned because three members of the MPC are drawn from it.

The Board of Directors are the Governor and eight other members who are appointed entirely at the discretion of the federal government (read finance ministry) and these don’t even have to be economists; even banking, accountancy and MBA-types can be chosen. The only restriction on the federal government is that each of the four provinces will have at least one member amongst these eight.

To sum it up, the SBP Governor is outnumbered eight-to-one here.

No points for guessing who will get to choose the three remaining members of the Monetary Policy Committee. So that yields six votes on the MPC to the finance ministry and four to the central bank.

Now anyone acquainted with the nuances of monetary policy will tell you that, regardless of how extremely central the interest rate is as a tool, there is still more to monetary policy. Like, the SBP-mandated Cash Reserve Ratio, for instance.

Although it is technically very much what a body titled The Monetary Policy Committee should be deciding, it has been somewhat up to the discretion of the Governor. The legislation seeks to change that. But not really.

Enter: another committee

The proposed legislation seeks to bring in an Executive Committee over to the central bank.

The aforementioned decisions like the CRR and other executive decisions have to be run by this committee by the Governor. The catch here is that, barring the Deputy Governor, all of the members are going to be appointed by the Governor. And to further twist the knife, the quorum of the Executive Committee is the Governor….and just one other member.

Other than perhaps the noting of minutes, this particular committee won’t change much in the scheme of things. And Q Block doesn’t seem to want to tread on this particular turf yet anyway.

Tarin has an edge…barely

The finance minister isn’t all too perturbed by the dissolution of the coordination body. He will still pretty much call the shots in the scheme of things.

He does have the numbers. But he will have to keep all of them (eight on the Board of Directors and definitely all six on the MPC) in line. Do keep in mind that the proposed legislation is also going to make the BoD and MPC members difficult to remove.

If there are multiple precedents for SBP Governors getting too big for their shoes, how will he ensure all six of his appointees in the MPC stay in their lane?

But what about future finance ministers?

There is also another scenario that the new legislation actually does give the central bank governor a disproportionate power in the dance. And that is in situations like the PPP government of ‘08-’13 and definitely the current PTI government. In these two dispensations, the finance portfolio has been a game of musical chairs. Not during the League’s tenure, where it was very clear that it was going to be Dar all the way. He was only removed from the portfolio only because of NAB, not because of some party intrigue by his successor Miftah Ismail.

In situations like those of the two governments, once the finance minister is removed from office, his appointees in the SBP’s Board of Directors and its Monetary Policy Committee might not want to play ball with the next guy. That’s a kind of vacuum that could bode well for the central bankers.

The Republic will inevitably stand up to The Company:

If all goes well, the IMF program will end in Oct, 2022. The current government will be under no compulsion to stick to the new legislation. The opposition has put in enough political capital into the idea that the legislation is a form of neo-colonialism. In the likelihood of any of the other two parties forming government in ‘23, they are also likely to revoke the legislation and reap political mileage from it. All of it doesn’t have to go out, however. If the central bank doesn’t rock the boat too much, it wouldn’t rile the next government enough to do away with some of the clauses of the proposed legislation, like the tenure security of the Governor and the members of the Board of Directors and the Monetary Policy Committee.

What is autonomy, then?

We need our civil servants to have autonomy. But for them to have too much autonomy runs counter to what democracies are supposed to look like. Even those civil servants who are supposed to be independent in all democracies (the judiciary) are bound to comply with the laws that the representatives of the people have drafted.

Questions about the autonomy of civil servants - not only the top brass at the central bank, but also the Deputy Commissioners managing the districts and the SSPs policing them - are to be addressed by the people themselves. There might be no one right answer for all nations. There might not be even one right answer for one nation through all of time.

These are issues that the polity has to grapple with, in a free and unfettered manner. Not bulldozed through by foreign bodies that hold some leverage over us. n

Economy seems to be at Full Employment, says CEO after fourth graduate engineer in row turns down Rs 20K/month job

The economy seems to be operating at Full Employment, concluded Syed Hassan Abbas, CEO after the fourth engineer in a row turned down his offer to work at MultiTech Energy at Rs 20,000 per month. “The central bank was right in its assertion that the economy is overheating,” said Abbas. “Here I am, practically begging youngsters to take jobs and they keep turning me down.” “They were telling me that the salary was too low and I told them that mechanical engineers have to make do with this,” he said, describing the engineers, two of whom are now preparing for their CSS exams, while the other two have taken call centre jobs while preparing for their visa applications.

“Either the economy is operating at full employment, or these guys are being ungrateful,” he said. “It’s because of youngsters like these that our national economy - and my company - hasn’t been able to grow much.”