Government postpones fiscal board meeting

Meeting called to review impact of monetary policy on economic growth

ISLAMABAD:

The government has postponed a scheduled meeting of the Monetary and Fiscal Policies Coordination Board due to unavailability of central bank governor amid growing criticism over giving absolute autonomy to the bank.

The high-powered board meeting had been convened on Monday, which was postponed due to unavailability of State Bank of Pakistan (SBP) Governor Dr Reza Baqir, said a senior finance ministry official.

The statutory meeting had been called to review the impact of monetary policy on investment, economic growth, balance of payments and the country’s international trade, said the officials.

They said that it was not for the first time that the central bank governor got the meeting rescheduled. Before last meeting in December 2020, the government had twice rescheduled the board meeting at the governor’s request.

The draft of the proposed SBP Amendment Bill 2021 shows that the government will abolish the Monetary and Fiscal Policies Coordination Board, which will end a 27-year-old institutional arrangement to align monetary policies with the country’s economic and fiscal policies.

The coordination board shall coordinate fiscal, monetary and exchange rate polices and ensure consistency in the macroeconomic targets for growth, inflation, fiscal, monetary and external accounts, reads Section 9B(2), which is now proposed to be omitted from the law.

In addition to the finance minister, the SBP governor, federal minister for commerce, commerce secretary, Planning Commission deputy chairman, finance secretary and two independent economists are members of the board.

The government has proposed sweeping changes to the central bank law, which has invited criticism from all sections of society.

The bill to amend the SBP Act 1956 is exceptionally dangerous for the economy and the country, and the amendment will make the State Bank autonomous from state domain and reverse the relationship, and it will be the state that will be legally obliged to feed the State Bank, said Dr Kaiser Bengali, an eminent economist.

Bengali said that effective macroeconomic management required monetary and fiscal policies to be administered in tandem but the bill would make monetary policy the exclusive domain of the State Bank and fiscal policy the domain of the federal government, thereby, delinking the administration of monetary and fiscal policies and consequently severely compromising macroeconomic management.

He stated that to date, the SBP was the depository of the country’s foreign currency reserves on behalf of the federal government. But the bill would authorise the State Bank to service the country’s foreign debt out of the available reserves without reference to the government, said Bengali.

When reserves fell below zero, “the bank shall request the federal government for a capital contribution to remedy the deficit” and “upon receipt of this request, the federal government shall, within a period not exceeding 30 calendar days, transfer to the bank the necessary amount,” he added.

Monday’s board meeting had also been called to review the implementation of decisions taken in the last meeting.

In the last meeting, the Planning Commission had recommended a reduction in interest rate to stimulate the economy. It also said that there was no need for further rupee depreciation.

Planning Commission Deputy Chairman Dr Jehanzeb Khan had argued in the meeting that the current policy rate of 7% was still high as compared to the regional countries.

The Planning Commission also raised the issue of exchange rate and stated that the previous rupee depreciation of about 30% against the US dollar did not increase exports. However, the commission noted that the depreciation helped curtail the trade deficit, primarily because of lower imports.

In the last meeting, board chairman Abdul Hafeez Shaikh also emphasised the active role of Monetary and Fiscal Policies Coordination Board in designing policies to address economic challenges. He gave directives for making the platform more effective for better coordination among all concerned to meet the desired macroeconomic goals.

Published in The Express Tribune, March 30^th, 2021.

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