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Abstract
This article argues that financial inclusion policy in Pakistan has been subsumed by the regulatory needs of the central bank, opening a divide between the ‘development approach’ of donors and the ‘regulatory approach’ of the central bank. This shift is identified in an emerging macro turn in central bank discourse and policy, which is steering the National Financial Inclusion Strategy away from the person-centred donor-driven agenda towards the imperative of shoring up rupee governance amidst burgeoning informal markets, low levels of bank intermediation and high levels of currency-in-circulation. The article argues that this rerouting of financial inclusion policy is ultimately a consequence of the central bank’s failure to grasp effective policy control over the rupee following rapid economic liberalization in the 1990s. The article explores why growing informality in money and markets is a problem for monetary governance; how financial inclusion answers to this predicament; and why the shift from poverty alleviation to monetary control remains unforeseen by donors. The article shows why inflation targeting – itself core to the wider liberalization project – hinges on the success of financial inclusion, thus revealing an important new driver propelling the financial inclusion agenda forward amidst implicit and unforeseen conflict between donors and the national leadership.
Acknowledgements
I would like to thank Gulmiti Faiz Ali for his excellent counsel during fieldwork for this article. In addition to those who kindly agreed to be interviewed in Pakistan, I am grateful to Muhammad Ismail Khan from the ADB’s Islamabad office for his generous assistance. I am ever grateful to Emeritus Professor Dick Bryan from Sydney University for his guidance in developing the ideas that have eventually become this article. Finally, I would like to thank the editors and anonymous reviewers from RIPE for their generous advice and feedback.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 For an accessible summary of transmission in Pakistan see www.sbp.org.pk/m_policy/index.asp, also Felipe (Citation2009).
2 Pakistan has been under IMF loans for all but seven years since 1988.
3 Monetary policy in Pakistan since the 1990s could be characterised as shifting from money supply targeting (which is common in developing economies in the shift from interventionist/developmentalist models towards liberalization and inflation targeting) to a transitional regime around 2009 in preparation for full inflation targeting, to be implemented in 2020. This trajectory tracks global trends, led by the advanced economies.
4 For details on hawala, including its long history on the sub-continent, see Siddiqui (Citation2014) and Thompson (Citation2011).
5 Prior to 1991, only foreign workers had access to foreign currency accounts and foreign cash had to be surrendered to the central bank. See Mirakhor and Zaidi (Citation2004).
6 Ironically, informal money market growth was given early succour from the SBP’s own policy of purchasing informal market dollars during the years of international sanctions after Pakistan’s nuclear tests. Amounting to $5.5 billion between 1998 and 2002 (SBP 2004: 159), these purchases were used to finance the current account deficit whilst escaping devaluation in the official exchange rate. SBP purchases revealed a surprising depth of liquidity in the informal market and gave it a crucial boost in its early, formative years (SBP, Citation2001, p. 159).
7 Another issue, which gets little press attention, is that informal money markets attract remittances that evade the current account and formal foreign exchange markets, resulting in a bigger current account gap and worse exchange rate.
8 See Settle (Citation2018) for further details on these measures. The ‘digitization of G2P payments’ is another celebrated area of Pakistani leadership in financial inclusion policy. See https://www.cgap.org/sites/default/files/CGAP-Brief-Branchless-Banking-in-Pakistan-A-Laboratory-for-Innovation-Oct-2011.pdf
9 The Findex Survey, funded by the Bill & Melinda Gates Foundation Citation2001 and the World Bank, examines financial behaviour in over 140 economies.
10 See SBP (2016).
11 Inflation hadn’t been a significant policy problem in Pakistan until the 1990s, when liberalization first took hold (Hamid et al., Citation1990; Hasan et al., Citation1995; Zaidi, Citation2005, p. 293). Exchange rate instability – especially devaluation – has persisted as an issue since the float of the rupee in 2000 and is entwined with severe inflationary bouts in the post-liberalization period.
12 See Al-Mashat, Clinton, Laxton and Wang’s chapter on modelling in the IMF’s book on inflation targeting (Tobias et al., Citation2018).
13 For example, if the informal sector is growing faster than the formal sector, then figure 1 and 2 overstate bank credit and deposits by increasingly understating GDP as informal growth outpaces formal growth over time.
14 On the use of misinvoicing by hawala dealers to net out payments, see Thompson (Citation2011).
15 On agricultural lending in Pakistan see Haq et al. Citation2013.
16 Observing the drop in savings held in banks, the SBP concluded that the propensity to consume had increased 10-fold between 2008 and 2011 (SBP, Citation2011, p. 55). The evidence suggests that the SBP was wrong and that Pakistanis were indeed saving, but not in banks.
17 See for example the Monetary Policy and Inflation chapter of the central bank’s 2012/2013 Annual Review and Abbas et al. (Citation2015). The Pakistan Institute of Development Economics Inflation Expectations Survey (https://www.pide.org.pk/pdf/reports/InflationReport_June2012.pdf) reports that 71% of respondents do not believe that the interest rate can control the inflation rate, whereas 12% reported that they did. This question was discontinued when the survey was taken over by the IBA in 2012 (available at http://dsqx.sbp.org.pk/ccs/survey.htm) however the IBA version still shows a consistent rate of close to 50% of respondents answering either ‘neutral or don‘t know’ when asked which direction they expect future inflation to move in, with even higher rates of unhinged expectations pertaining to future interest rates.
18 The key constraint on credit, according to the SBP itself, is the crowding out of private sector credit by government borrowing. See SBP (Citation2015, p. 3), also Khalid (2017).
19 For a review, see Sahay et al. (2015).
20 For example in using individuals’ digital footprint to tailor interest rates on credit to individual-specific risk profiles.
21 See https://www.findevgateway.org/sites/default/files/mfg-en-case-study-financial-services-for-the-poor-strategy-overview-nov-2010.pdf (accessed December 1st, 2019)
22 See https://www.gatesfoundation.org/what-we-do/global-growth-and-opportunity/financial-services-for-the-poor (accessed December 1st, 2019)
23 Including at the World Bank, DFiD, BMGF, ADB and Krandaaz.
24 The withholding tax on bank transactions, designed to incentivize tax file lodgement and imposed in 2015 reflects heterogeneity between government and central bank on financial inclusion. The tax is heavily criticized by the World Bank and the SBP for contributing to the decline in bank deposits but is defended by the Board of Revenue and the IMF for its capacity to address the fiercely low tax-to-GDP rate.
25 See Dafe (Citation2020) for a literature review.
Additional information
Notes on contributors
Antonia Settle
Antonia Settle is a McKenzie Postdoctoral Fellow and the Melbourne Institute of Applied Economic and Social Research at Melbourne University. Antonia received her PhD at Sydney University’s Political Economy Department in 2018. Her book, ‘Risk and the Rupee in Pakistan’s New Economy: Financial Inclusion and Monetary Change in a Frontier Market’, was published by Cambridge University Press in 2020.