The government of Pakistan can’t issue the rupee at will. This is a problem.

The State Bank of Pakistan (Amendment) Act, 2022 (Act No. VI of 2022) is a good case study to illustrate how the intersection of law, politics and institutions is of interest for anyone concerned about the governance of Pakistan. It illustrates how through legislation passed by elected political representatives of the people of Pakistan, the institutional architecture of policy is changed in the country, and how that in turn has an impact on the country’s governance. Section 9C of the SBP Act 1956 (as amended up to 28-01-2022) prohibits the Pakistani government from borrowing from the SBP. Since the government owns the SBP and hence its debts to the SBP are really debts to itself, it means that the government can no longer issue the rupee at will. The 2021 brief prepared by the Ministry of Finance and the SBP about misconceptions regarding the amendment acknowledges that SBP lending is the means through which the federal government may create money (“When the government borrows from the central bank, it is equivalent to printing money.”).

The Pakistani central bank is a public interest institution meant to “contribute to the stability of the financial system of Pakistan and supporting the general economic policies of the Federal Government to foster development and fuller utilization of the country’s productive resources;”.  The government of Pakistan and the people whom it represents are now stuck in an awkward position. The government which is entrusted with the governance of the country is unable to issue the national currency through a bank which is its own agent and which it fully owns and has fully owned since the SBP’s nationalization in 1974. When the SBP was formed, it served in part as an expression and symbol of the financial and monetary sovereignty of the country (Husain 1992, 56). In that sense, it served a nation building purpose, much like the First and Second Banks of the US following the US war of independence from the British (Knodell 2013). Today, the government of Pakistan has practically lost the ability to issue the Pakistani rupee at will. If this isn’t an issue of monetary and policy sovereignty, I don’t know what is.

The SBP’s position on this in the brief is the mainstream position: if the federal government continues to hold money creation power, it might exercise them imprudently, thereby leading to too much money which in turn will lead to inflation. This tells us that monetarist thinking is alive and well at the SBP. Whatever the demerits of monetarism, the issue is political, and politically the argument is as problematic as the view that the government should not be able to pass legislation because it might pass legislation with detrimental consequences. The government as the representative of the public must be able to exercise legislative powers as well as money creation powers. If there are negative consequences, let the people of Pakistan hold the government to account – through the exercise of free speech and criticism of the government’s policies, through the opposition in parliament, and at the ballot box. Holding the federal government accountable for its economic policy is not the proper social purpose of the SBP, much like holding the government accountable for defense and foreign policy is not the purpose of the military. That role belongs to the public, which could legitimately see this legislation as an encroachment on its role in the governance of the country. At present, the situation is akin to legislative powers being outsourced to a political consulting firm which is owned by the government and acts as an agent of the government. This needs to be changed.

What does the SBP stand for and what is the proper social purpose of the SBP? Dr Hafiz Pasha has written about SBP reform in his version of an economic charter. Dr. Pasha’s recommendations concern the improved distribution of credit across sectors, away from state owned enterprises, towards the “small borrower”, and a generally increased access to financial services. (I do not however, for the reasons outlined above, agree with him implied position that it is the job of the SBP to hold the ministry of finance accountable for its domestic bank borrowing.) This is all good and in the right direction, given what Dr. Pasha has already written about the distribution of credit in the UN Human Development report of 2020. But is this possible given the relationship between the SBP and the ministry of finance as established by the 2022 amendment?

Dr. Pasha’s suggestions presuppose institutional relations and intellectual approach very different from those presently in place. Credit planning and distribution are concerns of a politically and socially attentive approach to central banking, monetary policy and regulation of the financial system. That is not the economics which prevails at the SBP at the present moment. The SBP is independent but its governing legislation lacks a necessary mechanism to override its decisions, as required by Fischer (1994). Can Pakistan’s central bank once again accountable to the Pakistani public? It can, but that is conditional on parliament. Will the next elected government of Pakistan have the ability and political will to amend the SBP Act again, and in doing so, have an impact on how they as the representatives of the people of Pakistan hold the SBP accountable? All political parties should commit to amending the SBP Act in the lead up to the next elections to amend Section 9C. If we do end up with an economic charter, this commitment should be a part of the charter. This will, of course, not go down well with the IMF, or with any policy makers hoping to ease financial pressures by borrowing from the IMF again. From the public point of view, a reminder that international financial institutions have helped kick away the ladder for the now developing countries (Chang 2002) should help. We ought not to miss the IMF’s kiss of death too much.


Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press: London.

Fischer, Stanley. 1994. “Modern central banking.” In Capie, Forrest, Charles Goodhart, Stanley Fisher, and Norbert Schnadt (Editors). The Future of Central Banking: The Tercentenary Symposium of the Bank of England, p. 262–308. Cambridge University Press: Cambridge.

Husain, Aijaz. History of the State Bank of Pakistan: 1948–1960. State Bank of Pakistan Press: Karachi, 1992.

Knodell, Jane. 2013. “The nation-building purposes of early US central banks.” Review of Keynesian Economics 1, no. 3, Autumn, pp. 288-299.