The mistrust of a nation facing a fifth-generation war, our eternal belief in conspiracy theories, the fact that the current governor State Bank of Pakistan (SBP) is a former International Monetary Fund (IMF) employee, and a hyper-reaction by the SBP to the headline inflation in the past have all contributed to the current paranoia about the SBP Act.
Last week, I wrote an article explaining some of the proposed changes such as putting an end to the government’s direct borrowing from SBP, increased tenure of the governor, accountability provisions and more. But the debate continues.
Let’s first get a few facts straight. Firstly, the issue of who occupies the seat of the governor should not be confused with whether the central bank should be autonomous. The current governor might have come from the IMF, but that’s not always the case. Secondly, no matter what we write in the law, the parliament will always have the right to amend it. And history tells us that if we are in a hurry, we are also not shy of using ordinances to make important changes overnight. Thirdly and most importantly, there is a big difference between de jure and de facto power, more so in Pakistan. If someone believes that by merely amending the law, the SBP can ignore the prime minister, the cabinet and the whole federal government, (s)he probably does not know how this country works.
Now let’s come to more important questions. Why put more emphasis on price stability and less on growth? Putting price stability as a primary objective is not a novel concept and has been embraced by many countries. That, however, should not mean that the central bank becomes totally oblivious to the economic development concerns. In fact, macro-economic stabilisation is critical for sustained economic growth and for preventing the boom-and-bust cycles — the kind we have repeatedly experienced.
That being said, it also remains a fact that SBP by itself cannot control inflation, more so in an environment of supply-driven and cost-pushed inflation, and weak monetary policy transmission mechanisms. But without timely interventions by SBP, even the effects of supply-driven inflation could compound.
However, the SBP will also have to be cautious and not get carried away by inflationary concerns. No matter how autonomous a central bank may be, it cannot divorce itself from growth imperatives.
The proposed amendments, however, do keep room for the SBP to support growth. For instance, the SBP will continue its re-financing facilities, at least till our development finance institutions take up that role effectively. But in such refinancing schemes, credit allocation decisions rest with the commercial banks, which in turn remain accountable for asset quality indicators, like non-performing loans. The bottom line is that SBP will stay clear of the credit risk.
Then comes the accountability. Getting prior permission of the SBP Board, before the National Accountability Bureau (NAB) or Federal Investigation Agency (FIA) can initiate an investigation, is nothing new. In fact, Section 41(b) of the Securities and Exchange Commission Act provides the exact same protection to the SECP.
But if the SECP Act is to be considered a benchmark, one can see that the newly inserted conflict of interest provision and the amended provision for removal of governor in the SBP Act are quite weak and must be strengthened.
Lastly, let’s come to the logical underpinning of this whole issue. How has the present model of a subservient central bank worked in the past? If it has not worked well then we certainly need to change. And if what we are proposing is not different from what most of the other countries do and we are following the due legislative process to amend the law, there is no reason to panic. Let the parliamentary process take its course and rectify any glitches in the proposed draft.
Published in The Express Tribune, March 30th, 2021.
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