Spend generously to appease voters, and then get the State Bank of Pakistan (SBP) to finance it. Keep the interest rates low and play with exchange rate to stimulate demand and drive growth. By the time the import-led consumption would lead to a crisis, it would be someone else’s headache.
This is a time-tested economic management recipe in Pakistan. No wonder every new government ends up at the International Monetary Fund’s (IMF) doors.
The IMF reports from 2008, 2013 and 2018 all harped on the same point: the SBP’s continued financing of large fiscal deficits, driving broad money growth and currency support operations draining external reserves. They all recommended enhanced autonomy for the SBP with domestic price stability as the primary objective, flexible exchange rate policies and an end to direct lending to the government.
It was therefore hardly a surprise when the recent IMF programme again emphasised on the SBP’s autonomy. If anything, it was completely predictable.
The IMF has proposed a host of recommendations based on a new safeguards assessment including ensuring full operational independence of the SBP in pursuit of price stability as its primary objective, prohibiting monetary financing of public sector debt, and removing quasi-fiscal operations. It also suggested improving the SBP’s governance, including clear delineation between management and oversight functions, establishment of the Executive Board and protecting personal autonomy of members of the SBP Board and Monetary Policy Committee. The IMF’s recommendations also included strengthening legal provisions for external auditors, audit committee, and internal audit function; and statutory mechanisms for sufficient capitalisation and profit retention.
In simple terms, these recommendations mean taking the SBP out of the clutches of the Ministry of Finance (MoF) and providing it sufficient space to operate independently. This however is easier said than done. The governor State Bank has historically been playing second fiddle to the secretary or minister finance and mere legal changes cannot suddenly alter this balance of power.
Nevertheless, making statutory changes can be the first step and probably the best that IMF can push for, in the absence of indigenous political will. And that’s exactly what the recently-proposed amendments to SBP Act aim at, notwithstanding poor drafting and omissions at places or paranoia of SBP drafters manifested in excessive protection clauses to hedge against future meddling of the Q-Block. But there is definitely no conspiracy being hatched as alleged in the media.
Now let’s look at the proposed amendments.
Putting an end to the government’s direct borrowing from the SBP, dissolution of the Monetary and Fiscal Policies Coordination Board and the removal of secretary finance from SBP’s Board, all aim at cutting the cord between the MoF and the SBP.
The tenure of the governor has been increased to five years to delink the appointment from the electoral cycle, depoliticise the role and introduce well-needed policy continuity. The tenure of five years is in line with other central banks (including India), while the provision for re-appointment is not new and instead retained from the existing law.
The independent directors will now be appointed by the president, but on recommendation of the federal government. The only problem here is that the government will need to base its recommendations on a list of candidates proposed by the SBP’s Board itself, which seems cyclical and does not make sense. The federal government should be free to propose members who meet the requisite criteria.
The section on the removal of the governor has also been diluted, where previously he could be removed on breach of trust, but not anymore. Even the ground of serious misconduct has to be determined now by the court, which is ridiculous and needs to be fixed.
There has been a lot of criticism on proposing domestic price stability as the primary objective and ‘supporting general economic policies’ as a tertiary one. Interestingly, the existing law also does not mention supporting economic policies or growth, and instead focuses on supporting the regulation and growth of the monetary and credit system. Nevertheless, the law should mention sustainable growth as the ultimate objective. The Indian Reserve Bank Act also mentions price stability as its primary objective but keeping in view the objective of growth.
The new law is not explicit on who will set the inflation target and it should be made clear that the National Economic Council is the legitimate forum to provide the target range.
But apart from these minor glitches, there are no glaring issues in the new draft.
In fact, a new accountability clause has been added whereby the governor will have to appear in person before the parliament, which wasn’t there earlier. No accountability provision has been taken out from the existing law. The law also includes standard indemnity clauses, which are fairly common. There is a new provision, whereby permission will have to be sought from the federal government (and not SBP’s Board) before starting an investigation against any SBP employee. This provision seems to stem from general apprehension of public functionaries regarding uncalled-for NAB and anti-corruption investigations. Civil servants also demanded similar protection in the past without success. Nevertheless, such a provision strengthens the federal government’s hand over the SBP and not vice versa.
Furthermore, all SBP officials continue to be considered public servants and therefore subjected to Pakistan Penal Code’s stipulated offences for public servants (sections 161-171) including corruption. Similarly, the SBP’s accounts will continue to be audited by the Auditor General of Pakistan, besides two external auditors. In addition, the law now includes a conflict-of-interest clause, which will ensure transparency.
All in all, there is nothing fundamentally wrong with the proposed amendments. We have to realise that we do need to make the SBP autonomous or else it would continue to get exploited by the government to gain political brownie points through expansionary fiscal policies.
Published in The Express Tribune, March 23rd, 2021.