The State Bank of Pakistan is strongly egged-on by the IMF to push for obtaining decisive autonomy from the government so that it is able to pursue monetary policies without any interference. It is the push from the IMF that has made the federal cabinet to approve amendments to a law allowing the central bank to operate independently of government. This particular decision is the after-effect of an announcement by the IMF last month that it will resume a $6 billion rescue package that had been suspended for over one year.
SBP is keen to obtain autonomy principally in respect of free exchange rate regime and other related monetary issues that are considered to be affected by the interference of the federal government. In this context, the proposed draft of required amendments would need parliamentary approval to become law. One other aspect of this draft law is to allow a five-year term to the governor SBP in order to ensure continuation of policies. The law also aims to abolish the monetary and fiscal policy coordination board of the central bank and the bank will be made accountable to the parliament.
The official finance managers are presenting the draft amended as aiming to strengthen the country’s institutions and resultantly the economy. They add that greater autonomy to the central bank was in line with international standards with the mandate of price control and fighting inflation by adopting exchange rate and monetary policy in an autonomous manner without government’s interventions. The draft law also provided a five-year guaranteed term to the SBP governor instead of the existing three years. The government functionaries insist that the governor or the SBP would not remain unaccountable despite full autonomy and would be answerable to parliament where they would submit their reports instead of the federal government. The government side however could not justify the change in their policy that previously resisted autonomy to the SBP.
Significantly, the draft law has effectively surrendered government’s right to borrow from the central bank and instead adopt measures to meet its financial requirements through its own resources. In addition, the Monetary Policy and Fiscal Coordination Board would be abolished and the federal government would coordinate with the central bank through various committees. It was however clarified that inflation targets would continue to be set by the National Economic Council comprising the prime minister and provincial leaders and the governor and central bank would adopt exchange rate and monetary policies on the basis of NEC’s targets and would be judged on that basis.
The government finance team did concede that the submission of the SBP amendment bill to parliament was a prior action required by the IMF for taking up Pakistan’s case for revival of Extended Fund Facility by its executive board. Therefore, the cabinet also waived the requirement of mandatory clearance of the old and disputed bill from the Cabinet Committee on Disposal of Legislative Cases that had already taken up a revised draft reconciled by the finance ministry and SBP.
Consequently, under the SBP amendment bill, the authorised capital of the central bank would be Rs.500 billion and the SBP board would be empowered to increase the authorised capital through a resolution subject to government’s consent. The paid-up capital of the SBP will be Rs.100 billion to be made up through issuance of bonus shares by capitalising profits or general reserve or through subscription of shares in cash by the federal government. The board with a prior approval by the government will be able to increase paid-up capital as well.
The proposed amendments also entail that the SBP board led by the governor would be free to define, approve and determine general internal policies and rules of the bank regarding execution of its functions and approve internal rules and formulate and oversee foreign exchange reserve management, strategic investment and risk policy. The board will be also empowered to approve the central bank’s budget, annual reports and financial statements and adopt and monitor SBP’s policies on internal and external audit, compliance, internal controls and risk management.
It is also mentioned that the SBP will not guarantee any loan, advance or investment entered into by the government or its entities. Provided that the existing outstanding debt owed to the SBP in the form of loans, advances or government securities purchased on the primary market, at the time of the enactment of the SBP (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-profiting of such existing outstanding debt of the governments will be permitted.
The governor and the finance minister will establish a close liaison with each other and will keep each other fully informed on all matters which jointly concern the SBP and the Ministry of Finance. The Auditor General of Pakistan may, without prejudice to the autonomy of the bank and the audits conducted by the external auditors, conduct audit of the accounts of the SBP, but such audit will not have concern with the merits of the policy decisions. The governor, board of directors or deputy governor and members of the monetary policy, officers and employees of the SBP would be protected against any suit, prosecution or any other legal proceeding, including for damages for any act of commission or omission done in exercise or performance of any functions, power or duty. TW