Spend generously to appease voters, then ask the State Bank of Pakistan (SBP) to fund it. Keep interest rates low and play with the exchange rate to stimulate demand and stimulate growth. The moment import-induced consumption leads to a crisis, that would be someone else’s headache.
This is a proven recipe for economic management in Pakistan. No wonder each new government finds itself at the gates of the International Monetary Fund (IMF).
The 2008, 2013 and 2018 IMF reports all emphasized the same point: the SBP’s continued financing of large budget deficits, leading to broad money growth and currency support operations draining reserves. exterior. They all recommended increased autonomy for the SBP with domestic price stability as the main objective, flexible exchange rate policies and the end of direct loans to the government.
It was hardly a surprise, then, when the recent IMF program once again emphasized the autonomy of the SBP. If anything, it was completely predictable.
The IMF has offered a host of recommendations based on a new safeguards assessment, including ensuring full operational independence of the SBP in the pursuit of price stability as a primary objective, prohibiting monetary financing of the sector’s debt government and the elimination of quasi-fiscal operations. He also suggested improving the governance of the SBP, including a clear delineation between the functions of management and control, the establishment of the Executive Council and the protection of the personal autonomy of the members of the SBP Council and the Policy Committee. monetary. The IMF’s recommendations also included strengthening the legal provisions relating to the external auditors, the audit committee and the internal audit function; and statutory mechanisms for sufficient capitalization and retention of profits.
Simply put, these recommendations involve getting the SBP out of the clutches of the Ministry of Finance (MoF) and providing it with sufficient space to function independently. This, however, is easier said than done. The governor’s state bank has always played a supporting role to the secretary or minister of finance, and simple legal changes cannot abruptly alter this balance of power.
Nonetheless, making statutory changes may be the first and possibly the best step that the IMF can push, in the absence of local political will. And that is exactly what the recently proposed amendments to the SBP law are aiming for, despite poor drafting and omissions in some places or the paranoia of the drafters of SBP manifested in excessive protection clauses to guard against future interference by the government. Q-Block. But there is certainly no hatching conspiracy as the media claim.
Now let’s take a look at the proposed changes.
Ending direct government borrowing from the SBP, the dissolution of the Monetary and Fiscal Policy Coordination Council, and the removal of the finance secretary from the SBP board of directors, all aim to cut the cord between the MoF and the SBP .
The governor’s term was extended to five years to decouple the nomination from the electoral cycle, depoliticize the role and establish much-needed political continuity. The five-year term is in line with that of other central banks (including India), while the renewal provision is not new and is instead retained in existing law.
Independent directors will now be appointed by the president, but on the recommendation of the federal government. The only problem here is that the government will have to base its recommendations on a slate of candidates proposed by the SBP board itself, which seems cyclical and makes no sense. The federal government should be free to nominate members who meet the required criteria.
The governor’s dismissal section has also been diluted, where previously he could be dismissed for breach of trust, but not anymore. Even the ground for serious misconduct now has to be decided by the court, which is ridiculous and needs to be corrected.
There has been a lot of criticism of the proposition of domestic price stability as the main objective and of “supporting general economic policies” as the tertiary objective. Interestingly, the existing law also does not mention supporting economic policies or growth, but rather focuses on supporting the regulation and growth of the monetary and credit system. Nevertheless, the law should mention sustainable growth as the ultimate goal. The Indian Reserve Bank Act also mentions price stability as its primary objective, but with the objective of growth in mind.
The new law does not specify who will set the inflation target and it should be clarified that the National Economic Council is the legitimate body to provide the target range.
But other than these little issues, there aren’t any glaring issues with the new project.
In fact, a new accountability clause has been added requiring the governor to appear in person before Parliament, which was not there before. No liability provision has been removed from the existing law. The law also includes standard indemnity clauses, which are quite common. There is a new provision that requires authorization from the federal government (not the SBP board of directors) before launching an investigation against an SBP employee. This provision appears to stem from the general apprehension of public officials regarding unsolicited NAB and anti-corruption investigations. Officials have also demanded similar protection in the past without success. However, such a provision strengthens the federal government’s grip on the SBP and not the other way around.
In addition, all SBP officials continue to be considered public servants and therefore subject to the offenses provided for in the Pakistani Criminal Code for Public Officials (Articles 161-171), including corruption. Likewise, the accounts of the SBP will continue to be audited by the Auditor General of Pakistan, in addition to two external auditors. In addition, the law now includes a conflict of interest clause, which will ensure transparency.
Overall, there is nothing fundamentally wrong with the proposed amendments. We need to realize that we need to make the SBP self-sufficient, otherwise it would continue to be exploited by the government to earn political brownie points through expansionary fiscal policies.
Posted in The Express Tribune, March 23rd, 2021.