The controversy surrounding the autonomy of the State Bank of Pakistan is not a new one. The SBP autonomy issue has engaged the attention of successive governments in Pakistan. The PTI government is not the first to propose amendments to the SBP Act of 1956. The Act has been amended four times — in 1994, 1997, 2012 (by the PPP government) and 2015 (by the PML-N government).

This has been done to make the State Bank of Pakistan autonomous and empower it to play its role more effectively in strengthening the national economy. The State Bank of Pakistan (SBP) Amendment Bill 2021 was passed by the National Assembly amidst the opposition’s protest. Some of their suggestions had already been incorporated in the bill during discussion in the National Assembly Standing Committee on Finance.

All over the world, the central bank is allowed a high degree of autonomy so that it can take its decisions without interference from the government. The opposition’s criticism apart, for a meaningful analysis, it is important to discuss the pros and cons of the latest amendments to the Act.

Following the new law, the government won’t borrow from the SBP. Except for refinancing facilities that the SBP has used to support access to credit in underserved sectors, it won’t take any monetary action for the government of Pakistan. A new coordination mechanism between the SBP and the government will be made since the Monetary and Fiscal Policies Coordination Board (MFPCB) will cease to exist.

A new provision in the Act is that SBP employees, its board, or the Monetary Policy Committee (MPC) cannot be sued, prosecuted or held accountable for any of their professional actions conducted in good faith. Without the prior consent of the State Bank’s board of directors, no action, inquiry, investigation, or proceedings will be taken against the above by the NAB, FIA, or provincial investigation agencies, bureaus, or authorities.

On the advice of the government, the President of Pakistan will appoint for a term of five years the non-executive directors of the board and the governor of the SBP. The federal government will appoint deputy governors and external members of the MPC. The appointees would have no conflict of interest and will be able to be removed for serious misconduct as determined by court.

An executive committee consisting of the governor, deputy governors, executive directors and other officers, as needed, would make policy decisions related to the SBP’s core functions and administration and management matters, except for appointing external auditors and the chief internal auditor.

The governor/SBP will submit an annual report to the parliament on the bank’s objectives, the conduct of the monetary policy, the financial system, and half-yearly state of the economy reports. There are also plans to increase the SBP’s authorised (maximum shares that the SBP can issue) and paid-up capitals (money paid by shareholders). Authorised capitals will rise from one hundred million rupees to five hundred billion rupees and paid-up capitals by tenfold to one hundred billion rupees. Now dual nationals are barred from serving as SBP governors.

The underlying objectives behind the changes made are to give the SBP more functional and institutional autonomy. Needless to say, a financial regulator and banker’s bank must be able to make its own decisions. Recently, under pressure from the Erdogan government, the Turkish central government did not raise the interest rates due to which inflation increased manifold and the Turkish lira had to be massively devalued.

This is an object lesson for those who oppose giving autonomy to the State Bank of Pakistan. Thus, in future while the State Bank will fight inflation the government would have to focus on revenue generation instead of printing money as it cannot borrow from the SBP. The SBP’s regulatory functions would be strengthened as it will stay away from undertaking monetary acts for the government, like rural credit, industrial credit, export credit, loans guarantees, and housing credit.

The criticism that changes in the SBP Act will create a state within a state is invalid as the government would nominate the board members, governor, deputy governors, and external members of the Monetary Policy Committee. It was also essential to protect the professional acts of SBP employees, board members, and MPC members carried out in good faith from prosecution. In addition, tenure-protected key appointments, in which appointees can only be removed if they are found guilty of serious misconduct, are desired to reduce political interference in the regulator’s functions. Barring dual citizens from becoming governor and preventing the governor from joining any other international financial institution for two years after leaving the SBP should address the concern about the loyalty of the governor of the SBP to Pakistan.

All in all, it was a reform long overdue. The new law establishes a good balance between the SBP’s autonomy and its responsibilities. It will also go a long way to improve the SBP’s administrative and operational efficiencies.