An independent think tank has accused the State Bank of Pakistan of indirectly providing loans to the federal government, thus undermining the effectiveness of changes made to the State Bank’s regulations based on IMF recommendations.
The Policy Research Institute of Market Economy (PRIME) released a report titled “Pakistan Economic Freedom Audit: The Sound Money,” shedding light on the detrimental consequences of the close relationship between the State Bank and the Ministry of Finance. This relationship has resulted in soaring inflation and escalating debt levels. Despite amendments to the State Bank of Pakistan Act limiting its ability to extend credit to the government, financial intervention from the State Bank persists. It has ensured liquidity for commercial banks, which in turn have channeled funds to the government.
According to the report, the State Bank facilitated liquidity for scheduled banks through open market operations, amounting to Rs 10.3 trillion. These funds subsequently found their way to the government. The report argues that this approach is counterproductive: while policy rates are set to combat inflation, increasing the rupee supply through loans to the government via scheduled banks has not curbed money supply but has instead raised the government’s interest payments.
Furthermore, the State Bank’s practice of printing notes and providing them to commercial banks, which then lend them to the government at high interest rates, exacerbates the situation.