On August 13, 2025, the State Bank of Pakistan released its first-ever ‘Monetary Policy Report’ (MPR). The title of the report suggested it would analyze the effects of recent monetary policy decisions, but no such analysis was present. Instead, the report included two chapters, one on the review of national and international economic facts and another on the risks to the economic outlook.
In the last two years, inflation has seen a significant decline – from a peak of 38% in 2023 to 0% in March 2025, before rising to about 4% in July 2025. The State Bank considers this decline a success of its policy. The report attributes this reduction to the lagged effects of monetary policy, fiscal discipline, a stable exchange rate, and low global commodity prices.
However, the report nowhere clarifies how much of this success is due to attributable to State Bank’s monetary policy. In statistical research, the existence of a specific trend and correlation cannot establish causality. It cannot be said that the increase in interest rates caused the decline in inflation simply because inflation decreased a short time after interest rates were raised. In fact, the report itself admits that a reduction in the prices of wheat and energy, stability in the global market, and favorable base effects also played a key role in bringing prices down – what role could the State Bank have had in the emergence of these factors?
The State Bank’s policymaking largely relies on forecasts. For this purpose, the State Bank uses forecasts from international institutions and its own Forecast and Policy Analysis System (FPAS). If these forecasts turn out to be close to reality, they are presented as a policy success. But a good forecast does not mean that the forecaster played any role in achieving the results. For example, a stock market has thousands of small buyers, some of whom understand the market mechanism very well and can make good predictions. Such a prediction by no means suggests that the stock market’s fluctuations depend on the decisions of that small buyer. In reality, Pakistan’s share in global trade and the economy is very small, much like a small trader in the stock market, and the Pakistani market cannot influence the global market. Therefore, the indicators like oil prices and prices of other international commodities are never affected by Pakistani market conditions.
If the State Bank were to prove the effectiveness of its monetary policy, there are several scientific procedures available, such as the Granger causality test, Pear and Spirits Causality, counterfactual models, or standard research techniques like difference-in-differences, to separate the effects of changes in interest rates from other factors. However, neither this Monetary Policy Report nor any other research by the State Bank offers such an analysis.
The financial impact of monetary policy is unimaginably large. A mere 1% increase in the interest rate adds an additional burden of about Rs. 500 billion to annual interest payments. In comparison, the annual salaries and benefits of all State Bank employees would only amount to a few billion rupees – meaning the total financial impact of a 1% interest rate decision is hundreds of times greater than the impact of salaries. Despite this, while employee salaries are subject to audit, the decisions of the Monetary Policy Committee (MPC) are beyond any technical or parliamentary scrutiny.
This contradiction is illogical. We audit even small government purchases and contracts, but decisions that create a financial impact of thousands of billions of rupees do not face any technical audit or accountability. When more than 70% of the country’s tax revenues are used for interest payments due to the State Bank’s policy, Parliament’s Public Accounts Committee and related technical committees should have the authority to scrutinize these decisions, but they do not.
The matter of appointments at the State Bank also raises serious questions about the transparency of its decision-making. Central banking and commercial banking are two completely different fields – one’s purpose is price and financial stability, while the other’s is to earn profit. For this reason, the State Bank and commercial banks do not consider each other’s experience as relevant for hiring on ordinary jobs. Despite this fact, it is common for commercial bankers to be appointed to the highest positions in the State Bank, including Deputy Governor, which leads to a conflict of interest. These individuals may wittingly or unwittingly protect the interests of their former institutions, which can have financial effects extending to thousands of billions of rupees. At the same time, the decision-making of a commercial banker, who is trained to make a profit, can conflict with the fundamental goals central banks which include public welfare and economic stability. The report does not discuss this important governance issue.
The report’s emphasis on “risks to the economic outlook” seems to be a means of mentally preparing the public for a potential delay in further reducing interest rates. Today, with inflation hovering around 4%, keeping the interest rate at 11% seems illogical and causes public criticism. The MPC may maintain the interest rate in its next meeting by using these risks as a basis, but when it has not been proven that past changes in interest rates have affected inflation, the mention of these risks does not justify such a decision.
The effects of MPC decisions are so widespread that transparency is absolutely essential. It should be legally required that a scientific and transparent analysis of every major policy decision be published. Instead of providing transparency and evidence for its decisions, the State Bank wants to justify its actions simply by showing the global scenario with beautiful graphics. When, in fact, there is a need to create alternative scenarios and analyze inflation, GDP, and financial outcomes; to evaluate the effects of interest rates using a scientific method of cause and effect; and to grant an independent review panel of experts the authority to conduct an analytical review of the decisions.
The MPC’s decisions affect interest payments, which account for more than 50% of the total federal budget. In addition, countless economic factors such as the unemployment rate, budget deficit, GDP growth, and business costs depend on the MPC’s decisions. Unfortunately, these decisions are made without any meaningful technical audit. A credible monetary policy report must go beyond merely presenting data and risks – it must prove that the State Bank’s actions are actually effective, and that their benefits outweigh their costs.
Until this narrative changes into evidence, the Monetary Policy Report will remain a tool for self-praise rather than self-accountability, and the public, Parliament, and markets will not get the transparency they deserve.
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