NationalVOLUME 16 ISSUE # 15

Towards SBP’s autonomy

The government has decided to empower the State Bank of Pakistan by resetting its core function and prevent its working from political interference. The move will not only help the central bank play its due role in controlling inflation and currency through independent determination of monetary and exchange rates, but also help the country identify flaws in the system and rectify them.

The proposed amendment to the existing SBP Act aims at making the central bank autonomous as per international best practices. It will empower the bank to determine its own monetary and exchange rate policies, free of the government’s influence, which would also enable it to control prices. Though the amendment was proposed to meet the International Monetary Fund (IMF)’s condition, yet it will help the country achieve its true potential.

The federal cabinet approved three crucial bills, including the one allowing unprecedented autonomy to the central bank to target inflation, rather than economic growth. According to the SBP Amendment Bill, 2021, the central bank’s primary objective will be domestic price stability. Supporting economic policies has been declared the “tertiary objective” of the central bank, while the National Accountability Bureau (NAB) and the Federal Investigation Agency (FIA) cannot investigate the SBP governor, deputy governors, its executives and board and committee members. Former officials have also been provided with immunity from the NAB and the FIA.

The Monetary and Fiscal Policies Coordination Board has been proposed to be abolished, with a view to ending “risk of undue political influence over the SBP’s monetary policy”. The bill also proposes abolition of SBP’s powers to run quasi fiscal operations. A major change has been proposed in the preamble of the SBP bill. As against its current dual objectives of regulating the monetary and credit system and fostering growth, it has been proposed that domestic price stability will be the primary objective and fostering development and fuller utilisation of the country’s productive resources will be its tertiary objective.

A new clause has been inserted to make “Price Stability” the primary objective of the SBP. The central bank will have the freedom to determine and implement monetary policy, formulate and implement the exchange rate policy. However, no inflation target has been given in the bill. Also, in the future, the federal government cannot make legislation without consulting the SBP. “The bank shall be consulted ex ante on any proposed legislative act related to the bank,” according to the bill.

The definition of “monetary liabilities” has been introduced, which means total liabilities of the bank as reduced by the sum of “deposits of the government, amounts owing to the IMF, the WB, the ADB or other such instruments, deposits of foreign central banks or sovereign wealth funds, utilised swap lines of foreign central banks and balance of participant central banks under any clearing union”. Currently, the Chinese currency swaps, foreign central banks deposits and the IMF loans for balance of payments are part of the SBP liabilities, which understate the total public debt of the federal government. The central bank will have full authority to “acquire, hold and dispose of movable and immovable property of any kind”. It has been proposed to increase the authorised capital of the SBP to Rs500 billion and the paid-up capital to Rs100 billion. The paid-up capital will be made up through issuance of bonus shares by capitalisation of profits or general reserves or through subscription of shares in cash by the federal government.

However, the paid-up capital and general reserves of the bank have to be equal to 8pc of the monetary liabilities of the central bank. The federal finance secretary has been proposed to be removed from the SBP board but SBP Governor Dr Reza Baqir will remain the chairman of the board. “The bank shall not extend any direct credits to or guarantee any obligation of the government, or government-owned entity or any other public entity”, states the bill. The bank will also not purchase the government securities in the primary market but can purchase in the secondary markets. Also, the government will have to retire all its debt that it owes to the central bank at the already agreed schedules and no rollover would be allowed. The guarantees issued by the SBP to secure the obligations of the government outstanding at the enactment of the amended law “shall not be increased”. The Pakistan Railways overdraft will be converted into long-term debt for eight years and be charged at the market interest rates.

In the future, the SBP will allocate 20pc of its distributable profit to the general reserves account until the sum of the capital and general reserves is not equal to 8pc of the total monetary liabilities of the bank. A portion of the profit will also be retained to meet the identified liabilities of the central bank. The governor shall be appointed by the president for a period of five years, to be extended by another term of five years. The current term is three years. The deputy governors will be appointed by the federal government from a panel of three candidates for each vacant position recommended by the governor, following an early consultation with the finance minister. In case of the appointment of non-executive directors, there shall be a panel of three candidates. The external members of the MPC will be appointed by the federal government but on the recommendation of the SBP board.

No member of parliament or provincial assembly and member of a political party can be a member of the SBP board or the MPC. The maximum age for serving as governor and deputy governor will be 65 years. The appointment periods of the incumbent governor and deputy governors have been protected in the new law as well. The external members of the MPC will also be appointed for five years. Instead of the federal government, the remuneration, terms and conditions of the service of the governor and deputy governors will be determined by the SBP board. The governor’s salary will be determined by keeping in mind the prevalent salaries in the financial sector of Pakistan, which runs into hundreds of millions of rupees in some cases.

The government cannot remove the governor or deputy governor except in certain cases, which are defined under Section 13 of the proposed law. In case of deputy governor, the governor will also have to give recommendation for the removal. The government has also decided to appoint boards of directors, chairmen and chief executive officers of state-owned enterprises (SOEs) by their respective boards instead of secretaries and ministers to bring professionalism to the public sector. They would also be exempted from the application of the procurement rules to let them take independent decisions and compete with the private sector.

On paper, the only flaw in the proposal is that the appointment of the SBP governor and deputy governors should have been made through an independent board, instead of the president and the federal government. Still, it is hoped the new administrative powers to the central bank will not only improve its own function but also strengthen national institutions and the economy.