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This article contends that the State Bank of Pakistan (Amendment) Act, 2022 (“Act”) is plainly, on the face of it (ex facie), in violation of the Constitution. Reportedly, the government’s law minister thought the same about several provisions in the draft Bill that still appear in the Act (“Sections of Proposed Amendment Bill violate Constitution, says Dr Farogh Naseem,” Dawn, 2 Nov 2021).

Names can be deceptive. Although still called the “State Bank of Pakistan” (“SBP”), the Act moves both the old organisation and its functions outside the government. The new SBP created by the Act (“NSBP”) remains state-owned but is no longer a state-controlled public agency, subordinate to government.

Oversight of NSBP is with the Board of Directors (chaired by a Governor and consisting of eight voting non-executive directors, all private citizens, appointed by the federal government, and the Secretary, Finance, without voting right).

Once appointed, this Board has virtually unlimited powers, is accountable to no one, is indemnified against all actions in good faith, and with limited transparency — a recipe for scandals and abuses, and short of global best practices in central bank governance, as well. The Act also bars both NSBP and government from cooperation or communication with each other, impairing good governance and making NSBP a Vatican within Rome.

Constitutionally, ‘sovereignty’ — power and authority over all mortal persons—is a sacred trust that vests in the People. The People confer a specified portion (listed in the Constitution, Fourth Schedule) of this sovereignty to the legislature (to make Laws), the executive (to implement these laws by Policies), and the judicature (to render Judgments on them). Making and implementing policies about the “State Bank of Pakistan” (listed in the Fourth Schedule, together with its central banking functions, “CBFs”) are essential public functions entrusted to the federal government.

In transferring them, the Act violates the Constitution: “Art. 98. Conferring of functions on subordinate authorities. On the recommendation of the Federal Government, [Parliament] may by law confer functions upon officers or authorities subordinate to the Federal Government” (emphasis added).

This prohibits government and parliament to pass a law that confers government functions on ‘non-subordinate’ authorities. Yet, the Act does exactly this. Clearly, in enacting this Act, government and parliament have acted ‘beyond their powers’ (ultra vires). It is now only the judiciary that can take notice to correct this wrong.

The Act has also placed unlawful restrictions on powers and rights conferred by the Constitution on government and parliament. Under the Constitution (Arts. 141, 70), Parliament need not consult anyone in introducing and passing a Bill. In plain violation, the Act specifies that: “46B(8).

The [NSBP] shall be consulted prior to the introduction of any Bill by the Federal Government in the Parliament which may having a bearing on the functions of the [NSBP].” Equally, the Constitution (Art. 57) enjoins, effectively, that government functionaries can “take part in the proceedings” of a Parliamentary Committee, only through Ministers or the Attorney General.

In plain violation, s.46B(5) specifies that: “the [NSBP] shall directly submit the information and reports envisaged in section 39 to the concerned Standing Committee of the Parliament.” Both provisions are unconstitutional; and the government’s law minister reportedly concurs.

By Art. 97, the executive authority of the Federation extends to the State Bank of Pakistan (and CBFs). The Act contradicts this. This too is unconstitutional. Numerous other new provisions in the Act also violate the Constitution. In addition, the meaning and import of old provisions that have been retained have changed significantly because the NSBP is no longer a government agency.

A good example is the old s.46B(2) (under “Inconsistent directives not to be issued”) which in substance now appears as s.46B(4) (under “Functional and institutional autonomy”) of the Act: “The [NSBP], the members of its decision-making bodies and its staff shall neither request, nor take any instructions from any other person or entity, including Government... no person or entity shall seek to influence the members of the Board, Executive Committee, Monetary Policy Committee, or the staff of the Bank in the performance of their functions.” This was fine for a government agency.

But for a non-government entity this means that if the Prime Minister calls the Governor of NSBP to ask about movements in the exchange rate, he could be in violation of the Act.

While central bank autonomy is a desirable thing, it can only be effective and durable if legislative change is judiciously designed and carefully embedded in the constitutional framework and administrative practices of the country. It is received wisdom that “central bank autonomy is a means to an end, not an end in itself,” and legislation should recognise that “a constitution may limit the degree of legal autonomy that the central bank can possess, with respect to the discharge of certain functions” (Bank for International Settlements, “Issues in the Governance of Central Banks,” 2009, citing Japan’s 1997 law, with approval).

The latest thinking is that instead of central bank ‘autonomy’ governments should seek ‘accountable autonomy’ (in which transparency also plays a key role). “Too much independence,” warns Charles Goodhart, an eminent economist and long-serving Adviser, the Bank of England, “leads to an undesirable state within the state.”

The need not only is for parliamentary oversight but also for judicial review: “That the judiciary should control the lawfulness of the central bank’s actions and decisions in the fulfilment of its functions should be beyond question” (Goodhart and Lastra, “Central Bank Accountability and Judicial Review,” 2018). In its opportunistic excess, the IMF-staff drafted Act is over two decades behind the latest thinking on central bank autonomy.

To conclude, the Act’s extra-constitutional privatisation and insulation of central banking, an integral function of government — like defence, security, diplomacy, and the like — undermines constitutional governance in Pakistan.

As a result, it contains the seeds of its own failure while setting a dangerous precedent for admissibility of future demands, under financial and non-financial threats, for similarly privatising other government functions, especially on revenues, expenditures, grants, and borrowing. It is almost certain that the next demand will be for similar arrangements for the Federal Board of Revenue. Then, perhaps a constitutional amendment to undo the 18th amendment.

Could aspects of diplomacy and defence follow? Who knows what other milestones lie ahead on this road to serfdom? This is why it is imperative, now, for the courts and civil society to review and repeal this Act.

(The writer has served as Senior Economist with the World Bank and as Chief Economist of the Government of Pakistan. This article draws heavily on the substance of a letter, dated 8 Feb 2022, to the Hon’ble Chief Justice of Pakistan, requesting him to take suo motu notice of the Act)

Copyright Business Recorder, 2022

Arshad Zaman

The writer has served as Senior Economist with the World Bank in the 1970s and as the Chief Economist of the Government of Pakistan in the 1980s


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