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ISLAMABAD: The Pakistan Tehreek-e-Insaf (PTI) government amid the opposition protest introduced “the State Bank of Pakistan (Amendment) Bill, 2021” to protect the SBP officials for all actions undertaken in good faith, to exclude provisions related to the government borrowing as well as the quasi-fiscal operations of the State Bank, to facilitate financial institutions with appropriate checks and balance and to abolish the Monetary and Fiscal Coordination Board.

The opposition claimed, “The State Bank of Pakistan would become a “local branch” of the International Monetary Fund (IMF) after passage of this legislation.”

According to objects and reasons of “the State Bank of Pakistan (Amendment) Bill, 2021”, “the amendments propose to exclude provisions related to government borrowing as well as the quasi-fiscal operations of the State Bank. However, continue to extend refinance facilities to financial institutions with appropriate checks and balance. Further, lender of last resort function of the central bank has been further strengthened to enable it to provide temporary liquidity facility to banks against appropriate collateral. The amendments allow the SBP to be sufficiently capitalized and prescribe the necessary mechanism to achieve the desired level of capital overtime, through both statutory reserves as well as retained earnings.”

The objects and reasons of the bill further described as “the amendments, therefore, propose to add a provision for a general protection to SBP officials for all actions undertaken in good faith. In addition, the Monetary and Fiscal Coordination Board is proposed to be abolished, as its terms of reference overlap with the work that has been assigned to the Monetary Policy Committee under the existing Act and such a mechanism for coordination goes beyond provisions in the acts of other central banks. Instead, a new mechanism for coordination is being proposed between the Finance Minister and the Governor, under which they would establish a close liaison and keep each other Informed of matters that jointly concern the Ministry of Finance and the State Bank.”

It stated that the amendments have six key purposes: (1) to clearly define the objectives of the SBP to improve its accountability; (2) to outline the SBP’s functions in the line with these objectives; (3) to provide the SBP necessary financial resources to help achieve its objectives; (4) to strengthen the functional and administrative autonomy of the SBP; (5) to increase transparency in the operations of the SBP strengthening its governance; and (6) to enhance the SBP’s accountability by strengthening oversight functions and increasing reporting requirement.

Lack of consultations with allies leads to delay

“The amendment proposes to establish an Executive Committee at State Bank consisting of the governor and the deputy governors. This committee will be responsible for formulating policies related to the Bank’s core functions as well as those related to administration and management matters, excluding those matters falling in the purview of the Monetary Policy Committee or the Board of Directors. All policy decisions will be taken by Executive Committee,” the objects and reasons of the bill said.

According to new section 4A, 4B and 4C which is inserted “4A. Re-capitalization. -In the event that in the audited annual financial statements of the Bank, the sum of paid-up capital and general reserves falls below zero, then—

(a) the Board, with the advice of the external auditors of the Bank, shall examine and prepare a-report on the causes and extent of the shortfall within a period not exceeding thirty calendar days; (b) in the event that the Board approves the above mentioned report, the Bank shall request the Federal Government for a capital contribution to remedy the deficit with a view to restoring the capital to the level of prescribed paid-up capital under section 4; and (c) upon receipt of this request, the Federal Government shall, within a period not exceeding thirty calendar days, transfer to the Bank the necessary amount in cash or in negotiable debt instruments with a specified maturity issued at prevailing market-related interest rates.

4B. Objectives. - (1) The primary objective of the Bank shall be to achieve and maintain domestic price stability. (2) Without prejudice to the Bank’s primary objective, the Bank shall contribute to the stability of the financial system of Pakistan. (3) Subject to sub-sections (1) and (2), the Bank shall support the Government’s general economic policies with a view to contributing to fostering the development and fuller utilization of Pakistan’s productive resources.

4C. Functions of the Bank.- The functions of the Bank to achieve the objectives set forth in section 4B and as further described in this Act, shall be to: (a) determine and implement monetary policy; (b) formulate and implement the exchange rate policy; (c) carry out and disseminate research relevant to Bank’s objectives and functions; (d) hold and manage all international reserves of Pakistan; (e) issue and manage the currency of Pakistan, including regulating their denominations; (f) collect and produce statistics relevant to the Bank’s objectives and functions; (g) operate and exercise oversight over payment systems; (h) license, regulate and supervise scheduled banks and financial institutions that fall under the domain of the Bank as further specified in this Act or any other Act; resolve scheduled banks and other financial institutions that fall under the domain of the Bank as further specified in this Act or any other Act; (i) adopt and implement macro-prudential policy measures for scheduled banks and financial institutions that fall under the domain of the Bank; (j) act as the banker, financial adviser and fiscal agent to the Government, and its agencies, on the mutually agreed terms and conditions; (k) promote financial inclusion in Pakistan; (l) develop financial market infrastructures; (m) participate in international councils and organizations, including multilateral, international financial institutions, (n) cooperate with domestic and foreign public entities, concerning matters related to its objectives and functions; and (o) carry out any ancillary activities incidental to the exercise of its objectives under this Act.”

According to clause 9C of the bill, “Prohibition on the Government borrowing.—(1) The Bank shall not extend any direct credits to or guarantee any obligations of the Government, or any government-owned entity or any other public entity.(2) The prohibition laid down in sub-section (1) shall not apply to government-owned or publicly-owned banks and other regulated entities, which shall be given the same treatment as privately-owned banks.(3) The Bank shall not purchase securities issued by the Government or, any government-owned entity or any other public entity on the primary market. Nonetheless the bank may purchase such securities in the secondary market. (4) The bank shall not guarantee any loan, advance or investment entered into by the government, any government-owned entity or any other public entity: Provided that the existing outstanding debt owed to the Bank in the form of loans, advances or Government securities purchased on the primary market, at the time of the enactment of the State Bank of Pakistan (Amendment) Act, 2021 shall be retired in accordance with the terms and conditions under which such outstanding debts were extended. In compliance with the prohibition of monetary financing under this section no roll-over or re-profiling of such existing outstanding debt of the Federal and Sub-National Government owed to the Bank shall be permitted.(5) The guarantees issued by the Bank to secure the obligations of the Government outstanding as at the date of the enactment of the State Bank of Pakistan (Amendment) Act, 2021, shall not be increased, but can be rolled-over in accordance with the terms and conditions under which such outstanding guarantees were issued.”

According to clause 51 of the Bill, “52A. Protection of Action taken in good faith and indemnity.- (1) No suit, prosecution or any other legal proceeding including for damages shall lie against the Bank, Board of Directors or member thereof, Governor, Deputy Governors, member of any Board committee and Monetary Policy Committee, officers and employees of the Bank for any act of commission or omission done in exercise or performance of any functions, power or duty conferred or imposed by or under this Act upon such persons or any rules and regulations made thereunder or any legislation administered by the Bank, or rules and regulations made thereunder, unless such act of commission or omission is undertaken in bad faith and with mala fide intent. (2) The governor, deputy governors, directors, members of any Board committee and Monetary Policy Committee, officers and employees of the Bank shall not be liable in their personal capacity for any act of commission or omission undertaken in their official capacity in good faith. In case of any such proceedings as mentioned in sub-section (1), they shall be indemnified by the Bank which shall bear all the expenses thereof, unless an act or omission has been subsequently determined to have been undertaken in bad faith and with mala fide intent.”

Copyright Business Recorder, 2021

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