Given this fiscal dominance and its impact on the balance sheet of the central bank, the role of monetary policy has been severely restrained. Some might argue that the State Bank, as an independent organization, should have taken a tough stand against the government’s insatiable bank borrowings.
But, it is imperative to understand that any disruption in payment systems can potentially result in as negative repercussions for the economy as its inflationary consequences. This is the reason that SBP, despite not being comfortable to the idea, allowed the government to borrow from the banking system. Nevertheless, this trend needs to be checked in future.