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In a major development on the economic front, the Senate passed the State Bank of Pakistan (SBP) (Amendment) Bill 2021, paving way for resumption of the International Monetary Fund (IMF) programme. The IMF Executive Board is set to meet on February 2 for Pakistan's sixth review of the Extended Fund Facility (EFF).

The bill was tabled on Friday by Finance Minister Senator Shaukat Tarin, and passed by the Upper House with a margin of one vote. An initial vote-count indicated a 43-43 tie before Senate chair Sadiq Sanjrani voted in favour of the bill, helping the government meet prior conditions of the IMF's sixth review.

Saad Khan, Head of Research at IGI Securities, said passing of the bill would give much-needed room to the central bank to carry on with its objectives. “The SBP will now work according to their objectives, without any political interference,” he said.

He added the impediment stalling negotiations with the IMF and Pakistani authorities has finally been taken care of.

A number of amendments and sections, have been introduced to the SBP Act 1956 through the amendment bill.

Read more about the bill here

According to objects and reasons of “the State Bank of Pakistan (Amendment) Bill, 2021” earlier published in Business Recorder, “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 capitalised 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.

Meanwhile, Fahad Rauf, Head of Research at Ismail Iqbal Securities, said SBP objectives will now shift towards price stability. “The SBP's growth-led initiatives may scale back, as it will now focus on inflation,” said Rauf.

Earlier, in its bid to secure the next tranche of the IMF's Extended Fund Facility (EFF), the government also passed the Finance (Supplementary) Bill, known more commonly as the 'mini-budget', that withdraws sales tax exemptions to the tune of Rs343 billion.

The IMF Executive Board will meet on Wednesday (Feb 2) for Pakistan's sixth review under the EFF. Earlier, a staff-level agreement was reached in November last year on policies and reforms needed to complete the next review.

Completion of the review would make available SDR 750 million (about $1,059 million), bringing total disbursements under the EFF to about $3,027 million.

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