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Wednesday, May 22, 2024

Government proposes a fully autonomous SBP

To get IMF's extended relief package, the government has to propose an amendment to the SBP's constitution, making it autonomous. The central bank’s core objective will be domestic price stability but without accountability. A bill is due to be presented today in this regard.

One of the prerequisites to the Extended Fund Facility for release of around US$500 million, is granting autonomy to the State Bank of Pakistan (SBP), and for that reason, the federal government has decided to grant full autonomy to the SBP.

For this, an amendment bill is tabled to be passed. The SBP Amendment Bill, 2021, says that the central bank’s primary objective will be domestic price stability. This will be inserted as a new section 9F into SBP Act-1956.

The federal cabinet will take up the SBP Amendment Bill for approval in its meeting on Tuesday (today), which is a pre-condition along with about 30 other conditions to revive the stalled $6 billion IMF program.

According to the bill, supporting economic policies of the government will no longer be deemed as a primary goal of the bank, but rather will be a “tertiary objective”. On the other hand, State Bank’s governor, deputy governors, its executives, and board and committee members cannot be investigated by NAB or FIA.

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This has been the case in the past as well.

The amendment also seeks the abolishment of the Monetary and Fiscal Policies Coordination Board. This is to eliminate the risk of an undue political burden on the central bank. The bill also proposes to abolish the SBP’s mandate to run quasi-fiscal operations.

Last year, the first draft of the same bill was rejected by the Finance ministry as they proposed changes to it.

Thus, the Cabinet Committee on Legislative Cases (CCLC) postponed the approval of the said bill in April 2020, owing to the differences between the Ministry of Finance and SBP’s governor.

That is why this year, the State Bank is trying to bypass the CCLC, and the cabinet has requested to (i) waive, in consideration of the urgency, the condition of submitting the draft State Bank of Pakistan (Amendment) Bill, 2021 to the CCLC; and (ii) approve the Bill for introduction in the Parliament in terms of Rule 16(1)(a) read with Rule 27 of the Rules of Business, 1973.

Other Proposals in draft Bill

A major change to the preamble of the bill is the objective of the bank. A new clause has been inserted to make, ‘Price Stability’ the primary objective. This means that the central bank will have full autonomy over the determination and implementation of monetary policy and exchange rate policy.

Section 46B subsection 8 states that “The bank shall be consulted ex-ante on any proposed legislative action related to the Bank”, meaning that now SBP is a stakeholder in every legislative decision to be made in the future.

State bank now has full authority to acquire, hold and dispose of any movable and immovable property.

The federal secretary of finance has been proposed to be removed from the board, a step toward making the central bank. The governor will remain the chairman of the board.

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According to the bill. “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”. Furthermore, the bank will only purchase government securities in the secondary markets. The bill also states that the government will have to retire its debt to the central bank at the initially agreed rate and no rollover will be allowed. This means that the borrower, in this case, the government cannot pay a fee to defer full payment of the debt government has taken from the central bank.

According to the bill, the authorized capital of the country’s central bank shall be 500 billion rupees, divided into 5 billion shares of one hundred Rupees each. This authorized amount of capital may only be increased by the resolution of the board of the bank if the federal government agrees.

The paid-up capital of the Bank shall be Rs 100 billion, divided into one billion shares of one hundred Rupees each, which shall be made up via issuance of bonus shares by capitalizing of profits or general reserve or through the subscription of shares in cash by the Federal Government.

The capital shall be fully paid-up and held exclusively by the federal government and shall not be transferable to any other person or entity.

The tenure of the governor, deputy governor, and non-executive members was proposed to be increased from three to five years and they shall be eligible for re-appointment for another term.

The maximum age for the governor and the deputy governor will be 65 years. Governor’s and deputy governors’ salaries and conditions of services will be determined by the central bank. The salaries according to the bill will be determined by keeping in mind the prevalent salaries of the people in the same positions in the financial system of Pakistan. The government cannot remove the governor except in certain defined cases, and even for the deputy governor, the recommendation of the governor is necessary before taking such an action.

The condition of appointing economists as members of the Monetary Policy Committee has been abolished. MPC’s monetary policy decisions in the future would be independent of the economic policies of the then government and would be aligned with its primary objective.

An ‘executive committee’ under the governor SBP and with deputy governors and the executive directors of SBP shall be formed to decide on matters not explicitly mentioned in the laws.

On financial matters, the bill states that SBP will provide refinance only to the financial institutions. It will abolish the Rural Credit Fund, the Industrial Credit Fund, the Export Credit Fund, The Loans Credit Fund, and the Housing Credit Fund.

On the condition of the government’s guarantee, SBP can provide short-term loans to troubled commercial banks.

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The only accountability of the SBP is, when “the Governor shall submit an annual report before the Parliament regarding the achievement of the bank’s objectives, the conduct of the monetary policy, state of the economy and financial system”, meaning that no accountability measures for SBP are in place, in case it fails to meet its primary goal of price stabilization.