The federal government has prepared a draft bill proposing completeautonomy for the State bank of Pakistan (SBP). Once approved, the centralbank will be completely freed of all responsibilities of supportingeconomic growth and providing budgetary loans.
This move comes as part of efforts to revive the stalled InternationalMonetary Fund (IMF) program, Express Tribune reportedlinkonTuesday.
The draft ‘SBP Amendment Bill, 2021’ details that the central bank’sprimary objective will be domestic price stability. However, there is notargeted inflation given by the federal government, and no accountabilitymechanisms have been put in place in the bill in case the SBP fails tomaintain price stability.——————————
According to the SBP bill, supporting economic policies has been declared a“tertiary objective” of the central bank, while the National AccountabilityBureau (NAB) and the Federal Investigation Agency (FIA) cannot investigatethe SBP Governor, deputy governors, its executives, and board and committeemembers. The SBP’s former officials have also been provided with immunityfrom the NAB and the FIA.
In another related and major proposal, the government has also proposed theabolition of the Monetary and Fiscal Policies Coordination Board in aneffort to remove the “risk of undue political influence over the SBP’smonetary policy”. This was stated by the Ministry of Finance in addition todeclaring that the bill in concern also proposes to eliminate the SBP’spowers to run quasi-fiscal operations.
The federal cabinet will take up the draft bill for approval in its meetingscheduled to be held on Tuesday (today). Making the central bank fullyautonomous is a pre-condition to revive the stalled $6 billion IMF programin addition to around 30 more policy conditions.
Another of these conditions by the IMF is that the government withdraws 80income tax exemptions. The government will also present the finance bill inthe Senate today (Tuesday) for that purpose.
In April last year, the Cabinet Committee on Legislative Cases (CCLC)deferred the approval of the bill due to a difference of opinion betweenthe SBP and the Ministry of Finance over the extent of autonomy. This time,however, the ministry has sent the draft bill directly to the federalCabinet while bypassing the CCLC. It has also requested the Cabinet towaive the CCLC approval requirement citing the “urgency” of the matter.
Some of the salient features of the proposed bill are as follows:
The current dual objectives of the central bank of regulating the monetaryand credit system and fostering the growth of central bank have beenreplaced with the primary objective of domestic price stability and thetertiary objective of fostering development and fuller utilization of thecountry’s productive resources.
The central bank will have the freedom to determine and implement monetarypolicy, and formulate and implement the exchange rate policy. Also, in thefuture, the federal government cannot make legislation without consultingthe SBP.
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It has been proposed that the authorized capital of the SBP be increased toRs. 500 billion and the paid-up capital to Rs. 100 billion. It has alsobeen proposed that the federal Secretary of Finance be removed from the SBPboard. However, the SBP Governor, Dr. Reza Baqir, will remain the Chairmanof the Board.
Some prohibitions have also been placed on government borrowing. The draftbill states that the central bank will not extend any direct credits to orguarantee any obligation of the government, government-owned entity, or anyother public entity.
According to the proposed draft bill, the SBP will provide the refinancefacility to only the financial institutions The central bank will notpurchase or sell bills of exchange and promissory notes, nor will itpurchase the government debt in the primary market. However, it canpurchase them from the secondary markets.
Also, the government will have to retire all the debts that it owes to thecentral bank at the already-agreed schedules, and no rollover will beallowed.——————————
Regarding the appointments in the central bank, the draft bill outlinesthat the governor will be appointed by the president for a period of fiveyears, which may be extended by another term of five years. The currentterm is three years.
No member of the parliament, the provincial assembly, or a political partycan be on the board of the SBP.
The SBP can provide a short-term facility to a troubled commercial bank ifthe federal government provides guarantees to the SBP for giving such aloan.
The SBP Governor will submit an annual report before the Parliamentregarding the achievement of the bank’s objectives, the conduct of themonetary policy, and the state of the economy and financial system.
According to the proposed draft, the government or the quasi-governmententities will not have the authority to approve, suspend, annul, orinterfere with the management of the bank and of the members of the board,the executive committee, the MPC, or the staff of the bank. Additionally,the SBP employees cannot be instructed by the federal government.
