Should the State Bank of Pakistan be made autonomous?

In Blog
March 19, 2021
Mehreen Naushad
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Is making the State Bank of Pakistan (SBP) autonomous likely to strengthen the dwindling economic security of Pakistan? The Federal Government has proposed to grant the SBP with absolute autonomy. Accordingly, a draft bill has been introduced i.e. the State Bank of Pakistan Amendment Bill, 2021 before the National Assembly. The amendment to the central

Is making the State Bank of Pakistan (SBP) autonomous likely to strengthen the dwindling economic security of Pakistan? The Federal Government has proposed to grant the SBP with absolute autonomy. Accordingly, a draft bill has been introduced i.e. the State Bank of Pakistan Amendment Bill, 2021 before the National Assembly. The amendment to the central bank regulations is a part of a $6 billion International Monetary Fund loan agreed in July 2019 by the Federal Government. Accordingly, the Bill will make changes to the mandate, governance and autonomy of the SBP. The aim of the Bill is to free the Bank from its responsibilities of supporting economic growth and providing budgetary loans.

Salient Features of the Bill

The State Bank of Pakistan previously had dual objectives i.e. regulating monetary and credit system, and fostering growth. However, according to the Bill, the current primary objective of the central bank is to ensure domestic price stability, whereas fostering development and effective utilization of the state’s productive resources will serve as a tertiary objective. This means that the SBP now has the freedom to formulate and implement monetary and exchange rate policies. However, it is pertinent to note that the Bill does not define the target of inflation. Accordingly, the Bill has proposed to abolish the Monetary and Fiscal Policies Coordination Board has been proposed to be abolished on the grounds that it carries the risk of undue political influence over the SBP’s monetary policy. Furthermore, in an attempt to further curb the influence and interference from political machinations, the Federal Government can no longer can legislate on issues concerning SBP without their consultation.

Another important proposal made in the Bill is the prohibition on government borrowing. According to the Bill the SBP will not extend credits or guarantees to the Government, a Government-owned entity or any other public entity. Furthermore, the Bill also calls upon the Government to retire the debts it owes to the SBP.

However, what is perhaps the most relevant provision in the Bill is section 39 wherein there is no mention of an accountability mechanism. According to the provision, “The governor shall submit annual report before the parliament regarding the achievement of the bank’s objectives, conduct of monetary policy, state of the economy and the financial system. In addition, the parliament may require any senior official to attend at such additional times as may be required.” Moreover, the Government and any other quasi-government entities are prohibited from interfering with the management of the central bank. The Bill also provides indemnity to the Bank, its Board of Directors or Members, Governor, and Deputy Governors. The National Accountability Bureau and the Federal investigation Agency are also prohibited from initiating any investigation or action against the SBP.

The role of the SBP according to the Bill is now providing refinancing facility to financial institutions, short-term facility to troubled commercial banks. Moreover, the SBP is now prohibited from purchasing and selling bills of exchange, promissory notes and government debt in the primary market. The Bill also calls upon the SBP to abolish the Rural Credit Fund, the Industrial Credit Fund, the Export Credit Fund, The Loans Credit Fund and the Housing Credit Fund.

Analysis

The SBP has played a pivotal role throughout Pakistan’s history in keeping the economy of state afloat in turbulent times. More recently, the SBP has helped keep the economy from completely collapsing in 2020 when the Covid-19 pandemic first hit the world. Furthermore, the Bill seems to be necessary in order for Pakistan to secure the $6 billion aid from IMF. According to experts, the proposed reforms will give a good signal in the international market.

However, one of the biggest drawbacks which can be understood from making the SBP autonomous is the absence of any accountability framework. With the Bank being under the purview of the Federal Government, it could still be held accountable to a degree for its failures in the context of it meeting its responsibilities or set targets. However, with its independence, failure to reduce or limit inflation, for example, will be a failure which the Bank will not be penalized over by the Government. Therefore, the public suffering can easily last for a much longer period of time with uncertainty as to when the inflation will decrease and who will take an action on their behalf. Moreover, despite the prevalent corruption of state institutions within the country, there is still a sense of trust which the public has associated with the Federal Government. Hence, if the SBP stays under the control of the Government, there will be surety to a certain extent i.e. there will be accountability of the SBP if it were to deviate from its institutional purpose.

Secondly, the independence of the SBP will no doubt mean monetary pressure will be placed on the Federal Government. However, a benefit of passing the Bill is that there will now be an institution that is actually focusing on reducing inflation within the country. The SBP will be focusing and will have the responsibility to formulate the exchange rate policy. Although, doing so means that the SBP will be forgoing investment in growth of the country. It is and has always been the job of the Federal Government to make sure that not only appropriate legislations are introduced that encourage domestic growth, but also ensure that those legislations are also enforced with proper retributive provisions for failure of enforcement. The Federal Government must also certify that the aid which the country receives is invested for the very purpose it received it in the first place.

Furthermore, if inflation is controlled then the growth of the economy will be eventually improved. There will be increased employment opportunities due to the creation of jobs in the market. This would prove beneficial to the many unemployed laborers in Pakistan, and will also encourage foreign investors to invest in Pakistan. Although it is recommended that the inclusion of an inflation target will make this new Bill more people friendly, as the public will be made aware of how much reduction in inflation the SBP aims to achieve within a given timeframe.

Furthermore, the benefit for the passing of the Bill is that the SBP will become free from government interventions which is more often than not done so due to political reasons. This means that the general internal policies and rules which are to be enforced within the SBP will now be free from any political bias, as the Bill requires that the Federal Secretary of Finance be removed from the Board of Directors of the SBP. The Bill has also proposed to abolish the Monetary and Fiscal Coordination Board which is currently under the Chairman of the Ministry of Finance. The legislation also prohibits the government from borrowing from it and instead, it will force the government to use its own resources.

The Bill infringes upon the concept of sovereignty, specifically the sovereignty of the Federal Government of Pakistan. The Bill proposes for the SBP to be made completely independent of the Government’s interference. This is, once again, linked with the requirement for accountability. In the past, the SBP has failed to ensure price stability countless times and therefore, giving it complete independence with such a failure in mind is indeed concerning as there is no guarantee that the SBP will be able to achieve its aim of price stability this time, especially with no accountability mechanism. This, unfortunately, becomes even more concerning considering that the Bill proposes immunity from NAB and FIA. This, naturally, leads ones to wonder how the SBP will be held responsible if it fails to reduce inflation within the country? Despite it being argued that the Board can create retributive provisions which provide the element of accountability, it should be noted that the possibility of bias can be strong, unless those provisions place the duty of holding SBP accountable upon a separate and independent entity.