We share insights by several commentators, who have been looking at the issue, whether Pakistan needs to make its State Bank autonomous? Is the autonomy agenda being driven by the IMF, and what are their concerns, if any?
Dr Abid Qaiyum Suleri
Social Policy Analyst & Development Practitioner
Discussing whether or not the State Bank of Pakistan should be autonomous is the same as whether we should send children to school? It is an established international best practice that State Banks should be free from any political interference.
In my opinion, the actual discussion should be about the contours and objectives of that autonomy. I believe there are 3-4 draft ordinances currently being circulated. Which of those would be finally presented to the parliament is not yet known.
So currently, it would be premature to discuss fear of the unknown. There are a few things we must keep in mind. Firstly, why was there a need for these changes? Because previous governments (not government), whenever facing a fiscal deficit, would immediately go for state bank borrowing (to print currency notes), which in turn gives rise to inflation.
Secondly, when the rupee was being kept stable with the dollar, it was done by encashing the State Banks dollar reserves in the open market, which was a significant hit to our foreign currency reserves.
So the fundamental reason for making the State Bank independent from the government is to correct the chronic structural issues of our economy. We already had seen positive results of linking the foreign exchange with demand and supply in the open market.
At that time, too, similar concerns of “unknown” were raised. We need to step out of our fear of the unknown and modernize our state bank.
Former Member of The Prime Minister’s Economic Advisory Council
The government is seeking to rush through consequential legislation to meet IMF conditionality. One of these pertains to fundamental changes in the State Bank of Pakistan Act.
The primary purpose is to make the central bank completely independent of any oversight and accountability from parliament or the government and its agencies, along with other fundamental changes to its governance.
Arguably the most controversial and problematic change concerns State Bank of Pakistan’s mandate. Under the long-standing State Bank of Pakistan Act of 1956, the central bank was given a dual mandate of promoting economic growth along with ensuring monetary stability.
Under the International Monetary Fund (IMF)-mandated amendments, State Bank of Pakistan’s primary objective will be ensuring price stability. Support for economic policies of the government has been relegated to a ‘tertiary’ (not even secondary) objective.
In effect, State Bank of Pakistan will become an inflation-targeting institution and join a handful of mostly developed countries with this sole mandate for their central bank. On paper, complete independence of the central bank is desirable in the context of fiscal domination (i.e., when the central bank is relegated to the money-printing arm of the government) or in the presence of dynamic (or time) inconsistent policymakers.
Independence can ensure the central bank can promote economic stability free from political interference. However, it is unclear why sweeping changes are necessary to the mandate of State Bank of Pakistan, especially since inflation in Pakistan, at least over the past decade, has been a function of supply-side factors, terms of trade shocks, currency devaluations, increases in administered prices (such as electricity tariffs), and market-imperfections – rather than excess demand.
How an inflation-targeting framework is going to address the issue of inflation in Pakistan’s context is not just puzzling – but outright questionable. If anything, the clear and present danger is that its premature adoption will permanently suppress economic growth.
Pakistan is short on economic growth and long on constraints to it. The last thing it needs is for a completely avoidable institutional constraint to be added to the list.
Journalist, Economist, & Financial & Development Consultant
SBP’s internal team has been working on the amendments since 2015. This implies the process was not carried out in haste; however, the draft bill is still not made public, which led to a mad rush of speculation in the print and electronic media.
I strongly urge the ministry to release the full draft version for a broader debate. However, with the information we currently possess, the amendments sought to make State Bank of Pakistan more autonomous and provide it with a clear mandate, a welcome move.
In the past, State Bank of Pakistan had often remained under the thumb of MoF. Politically-motivated monetary and exchange rate policies were adopted to create a perception of a better economic picture before successive general elections.
If the reforms are to happen, Pakistan has a fair chance to come out of the rut of frequent boom and bust cycles. The confusion and public concerns over the proposed bill may persist even after its passage from the parliament.
The best way of addressing these concerns is to further enhance parliamentary oversight of the central bank’s operations. That may not be a big trade-off for an independent and autonomous State Bank of Pakistan, free from the executive branch’s influence.
Pakistan has had a history of high fiscal deficits, which heighten inflation expectations, increase inflation volatility and result in interest rate uncertainty, which in turn inhibit long-term growth in output.
The move toward State Bank of Pakistan’s greater autonomy has to be welcomed since it precludes the adverse consequences of deficit spending. Autonomy provides the central the necessary independence to conduct policy that is free from direct political or governmental influence.
By preventing the government’s ability to directly finance its expenditure by borrowing from State Bank of Pakistan, it is exposed the government to market imperatives and place external fiscal discipline that should discourage governments from fueling unsustainable growth on the back of excessive borrowing.
However, in a democracy where Parliament represents the will of the people, the desire of politicians to boost growth and provide employment versus the central bank’s mandate of controlling inflation should be addressed by an explicit commitment to meet a specified inflation rate or range within a specified time frame that is reviewed and agreed with the elected government.
Finally, autonomy and the adoption of inflation targeting has to accompanied by broader policy measures and investments to mitigate against supply-side constraints that can lead to commodity shortages and precipitous price hikes.
Dr. Farrukh Saleem
Political Scientist, Economist, Journalist, & a Television Personality
We should be asking ourselves: Do we want our institutions to be free of political interference? Do we want independent institutions? Do we want politicians to manipulate monetary policy for election purposes? Should politicians be allowed to prioritize short-term goals over the long-term health of the economy?
The State Bank of Pakistan Amendments are as per ‘international best practices’ based on 95 Central Banks worldwide. State Bank of Pakistan must be institutionally independent from political interference, insulated from executive or legislative interference. Work on State Bank of Pakistan Amendments started in 2015, and I support PTI’s efforts in this direction.
Journalist, Head of Hum News, Former editor: The News, The Muslim
& Former Md PTV
There could not be two opinions about granting operational autonomy to the State Bank of Pakistan but is it prudent to grant absolute authority to a critical state institution, or rather the individual heading it, without any ‘real’ accountability?
In a country plagued with poverty, unemployment, ethnic and social fault lines, where at times textbook financial guidelines may need prudent adjustments in the larger national interest, can we afford a federal reserve bank existing in a void, or do we need one operating in a consultative mode with the government?
Unfortunately, the proposed bill to amend the State Bank of Pakistan Act, 1956 is destined to do more damage than good. This bill attains critical import because it will grant unlimited powers and absolute immunity to the incumbent SBP management for all actions, past, present, and future.
Controversies already linger that must first be put to rest. To name a few; the unprecedented jacking up of interest rates destroying local businesses; the consequent hot money inflow and outflow with its costly ramifications; roller coaster movement of exchange rate, certain policy measures making sense for vested interests but not necessarily for the overall business scene, etc.
Equally important, both the governor and his hand-picked deputy governor came straight from IMF, and the proposed draft reeks of IMF priorities. For instance, the ‘definitions section’ has been amended to include IMF & World Bank by name, meaning thereby that the status of their liabilities will reflect the monetary liability component of the bank, which will now also have a totally revamped roster of priorities.
Read more: Government proposes a fully autonomous SBP
In layman’s terms, their loan repayments assume a rather untouchable priority status, way above prioritizing the development of the country’s human capital. Third priority to economic development: In a country where almost 40 percent population is below the poverty line, while another 20% barely hold their heads above water; contributing to national economic development would now be just a tertiary objective.
Absolute Immunity: No officer, starting from the governor to the lowly clerk, can be investigated for any crime or action by any authority of the country. The Teflon cover even extends to all retired and former officials.
In other words, presidents, prime ministers, superior court judges, and army chiefs can be investigated and held accountable for their wrongdoings in Pakistan but no official of SBP. Seriously?
Governor’s Fiefdom: The SBP governor will now be no less than the financial viceroy of this former British colony, all-powerful and answerable to none. Government shall be bound to appoint deputy governors etc., only from a choice-list given by the governor himself, and none of these officials can be fired without his/her consent.
Heck, practically, it will be impossible for the governor himself to be replaced unless he is first convicted by a court of law, and judging from the way courts operate, we are talking eternity here.
Of course, there is the ‘stated’ position of an all-powerful board of directors which would be holding everyone accountable to varying degrees, but here’s the cherry on the top: guess who heads this board? Viola, the omnipotent governor himself! No prizes here for guessing in whose direction the board will bend.
Accountability Farce: A deliberate misperception is being created of the governor and his team being held accountable by the parliament. Pure hogwash! The proposed bill only talks about SBP submitting its performance report to the parliament and nothing more.
In a policy and legal context, submitting information does not automatically translate into accountability. As a fig leaf, the Auditor General, too, has been allowed to conduct an annual audit of SBP, but the entire exercise reduced to a farce by stipulating that, “Such audit shall not have concern with the merits of the policy decisions including implementation thereof by the bank.” So why even bother with this wasteful exercise?
When examined clause by clause, the proposed bill reveals a naked attempt to create proxy leverage for the Bretton Woods institutions in particular. However, owing to paucity of space, let’s keep the exhaustive review for the future, hoping meanwhile that better sense shall prevail in Islamabad. Independence of institutional operation freedom must not be confused with creating a state within a state