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EDITORIAL: Earlier this week, the federal cabinet approved the International Monetary Fund (IMF) conditions-aligned draft amendments in the State Bank of Pakistan (SBP) Act. These amendments have been long overdue and reflect the international best practices and domestic experience of the central bank. The proposed amendments define the objectives to improve accountability of the SBP and outline its functions in conformity with its objectives. They also address the necessary financial resources needed to achieve the defined objectives, increase functional and administrative autonomy, improve transparency in its operations and above all; strengthen accountability of its regulatees by making its oversight functions more robust along with enhanced reporting requirements. Business Recorder has always advocated greater central bank autonomy. If the amendments are adopted by parliament, SBP will have enhanced ability to perform its primary function of domestic price stability combined with its secondary objective of financial stability and tertiary aim of augmenting the government’s efforts to foster development and fuller utilization of resources.

To achieve these objectives, SBP’s functions will have to be suitably aligned: that would require sufficient financial resources in the shape of share capital, reserves, distribution of profits and recapitalization, if and when needed. The existing SBP mandate of carrying out quasi-fiscal operations that include rural, industrial and export credit, loan guarantees and housing credit shall be abolished, however, SBP shall continue to be able to provide refinancing facilities through the banking system. The existing Monetary and Fiscal Policy Co-Ordination Board, an Ishaq Dar creation that allowed the ministry of finance to influence SBP-mandated functions, shall be abolished and instead the SBP Governor and the Finance Minister will be required to liaise and keep each other briefed on all matters that jointly concern the Finance Division and the Central Bank.

Another important element that is essential for institutions and bodies corporate, is indemnity to its functionaries in respect of decision-making in good faith. This indemnity is not present in the existing SBP law. Its functionaries enjoy this indemnity by virtue of the Banking Companies Ordinance that governs all banking companies. For the sake of good order, such indemnity is proposed to be part of the SBP Act. However, a departure has been made from the established norm by mentioning the National Accountability Bureau (NAB) and Federal Investigation Agency (FIA) by name. This is most unusual and smacks of targeted protection rather than an ominous protection. Furthermore, indemnity is sought for the SBP as an institution itself rather than just its functionaries acting in good faith. This aspect of the proposed amendments needs to be reconsidered and brought in conformity with established norms. It is obvious that the SBP officials, too, are dreading the NAB. A former SBP Governor, for example, is facing a NAB investigation for decisions taken while he was in office. Through the proposed amendment an attempt has been made to tackle his difficulties as well by extending the proposed indemnity to former directors, Governors, Deputy Governors, etc.

Direct government borrowing from the SBP will also come to an end. Government borrowing from central bank has inflationary consequences especially in a country like Pakistan where large budget deficits are a chronic economic challenge. The office of governor SBP would be accountable to the parliament. This means that the institution would come out of the influence of the finance ministry. But it is important to note that there is a close link between fiscal and monetary policies. In other words, high and persistent fiscal deficits has an adverse bearing and puts pressure on monetary policy decision-making.

Finance ministry or the government is the biggest recipient of bank credit in the country. Borrowing is therefore always skewed in favour of the government. If the ministry is part of the decision-making process, monetary policy formulation cannot be independent. The function of price stability, therefore, is compromised in the process. Moreover, the abolishment of the fiscal and monetary policy board shall create a firewall between the functioning of SBP in Karachi, and the Q Block in Islamabad. It is important to recall times when governors used to seek permission from finance ministers for even petty matters such as permission for international travel. Frequent interferences by the ministry of finance in forex market operations in particular had virtually crippled SBP autonomy and independence.

The function of price stability is of paramount importance. The country is going through a high inflationary cycle that has eroded the purchasing power of the common man. This is not the first time that inflation is high in Pakistan; in the few decades, there were several such instances when inflation soared to double digits.

Lack of SBP autonomy reduces the efficacy of monetary policy transmission. The presence of finance secretary on SBP board constitutes a challenge to the bank’s autonomy. This, coupled with other operational interferences, by the ministry puts the central bank in a strait jacket. With the passage of the proposed amendments to the SBP Act, the central bank will be more autonomous in letter and spirit. However, this does not mean that SBP governor will now be less accountable; in fact, the situation could be the other way around. Hamstrung by the absence of the protective shield of finance ministry, direct accountability to parliament will demand from it greater responsibility and transparency in policymaking. In other words, central bank will be required to justify its actions or decisions on grounds based on vigorous due diligence, extraordinary farsightedness and greater transparency in order to avoid parliamentary censures.

The governor’s term is proposed to change from three to five years. That is in line with the policy in numerous central banks across the world. Four out of five previous SBP governors were unable to complete their respective three-year tenure due to growing government interference they faced in decision-making processes. This reflects the chasm that exists due to the de jure and de facto scenarios that continue to plague our governance landscape. If the SBP is to be truly made autonomous it is imperative that it is extricated from the domain of the ministry of finance and put under the Cabinet Division to satisfy the requirements of the government’s ‘Rules of Business’, without which, we dare say that the goal of greater SBP autonomy will always remain elusive.

Copyright Business Recorder, 2021

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