Revised SBP bill vague on inflation

Documents show govt failed to win back ground conceded in Feb-Mar 2021

ISLAMABAD:

The revised State Bank of Pakistan (SBP) Amendment Bill still remains vague about the inflation target and accountability of the central bank governor for missing the goal while maintaining a complete ban on federal government’s borrowing, reveals a new draft.

A comparison of the SBP Amendment Bill – passed by the federal cabinet in March 2021 but later withdrawn – and the revised bill circulated for cabinet’s approval disclosed that the International Monetary Fund (IMF) did not budge much from its earlier stance.

This is despite the fact that the government spent months and burnt the proverbial midnight oil in negotiating concessions with the IMF.

The Cabinet Committee on Legislative Cases (CCLC) approved the draft on Friday that was circulated for cabinet’s approval.

The federal cabinet on Tuesday deferred the approval of the revised SBP Amendment Bill 2021. It was also taken up for discussion by the newly constituted Economic Executive Council (EEC) on Thursday.

The approval of the bill is the precondition of the IMF for the revival of the stalled bailout programme on January 12.

The EEC recommended certain changes in the SBP draft that had already been approved by the CCLC. It is not clear whether the bill will now again go back to the CCLC, although Information Minister Fawad Chaudhry said on Tuesday that the CCLC would again take up the SBP draft bill.

But documents suggest that the government has not been able to win back any significant ground that it had conceded during the February-March 2021 round of negotiations with the IMF.

In the revised bill, the government has proposed a definition of price stability, which will now be the core objective of the central bank.

Price stability has been defined as “the maintenance of low and stable inflation guided by the government’s medium-term inflation target”. However, the words low, stable and the target have not been defined anywhere in the revised bill.

In the current fiscal year, the central bank was pursuing 7-9% inflation target but the SBP suddenly increased it to 9-11% without taking any responsibility for the surge.

The federal cabinet had approved the draft of the SBP Amendment Bill on March 9, 2021 without even reading it.

“The (March) amendments have been reviewed by the Finance Division in consultation with the Law and Justice Division, SBP and the IMF,” the cabinet was informed on Tuesday this week.

The revised version of the bill entails more focus on accountability and balancing the autonomy of the central bank, it added.

Ban on borrowing

The central bank shall not extend any direct credit to or guarantee any obligations of the government, or any government-owned entity or any other public entity, according to a clause of the revised draft, which is similar to the one the cabinet approved in March this year.

This is a major source of concern for many people, as the country has been left at the mercy of commercial banks. There has already been a complete ban on government borrowing from the SBP since July 2019 and yet there is a double-digit growth in currency in circulation and inflation has also remained out of control.

Read Foreign exchange: SBP reserves fall $415m to $18.15b

The revised bill stated that the SBP shall not purchase securities issued by the government or any government-owned entity or any other public entity on the primary market. But it may purchase such securities in the secondary market.

However, the provision related to converting the Pakistan Railways’ overdraft into long-term debt of eight-year duration has been deleted in the revised draft.

Vague accountability

The accountability clause remains as vague as it was earlier. In the name of accountability, “the governor shall submit an annual report before parliament regarding the achievement of the bank’s objectives, the conduct of monetary policy, state of the economy and the financial system”.

Some ground has been retrieved in the case of removal of the SBP governor. As against the earlier proposal that the governor can only be removed on misconduct if it is proven in a court of law, now the federal government “may remove” the governor, or a deputy governor, if he is guilty of gross misconduct; or is incapable of properly performing the duties of his office by reason of physical or mental incapacity.

However, the governor’s proposed powers to remove the deputy governor have been withdrawn.

Appointment

The finance minister’s powers to appoint a deputy governor have been further curtailed when compared with the March 2021 bill.

Now, “early consultation” between the finance minister and SBP governor will not be required and the federal government will appoint a deputy governor from a panel of three recommended by the governor, in order of merit.

The secretary Finance Division has been proposed to be retained on the board but “without the right to vote”.

The governor shall be the chairperson of the board. In the governor’s absence, the board shall be chaired by the deputy governor in charge of the board meeting agenda items.

The government could not convince the IMF to separate the positions of the SBP governor and the chairperson of the board.

Read more Private sector borrowing rises despite rate hike

The deputy governor has been given the right to cast the decisive vote in the case when the governor is absent and the deputy governor chairs the board.

No change was made in the clause that requires that the SBP’s paid up capital and general reserves will be increased to 8% of its monetary liabilities through allocations of distribution profits.

There was no change in the functions and composition of the Executive Committee, proposed under the new law.

The Monetary and Fiscal Policies Coordination Board has been proposed to be abolished, despite the government’s strong desire to retain it. In its place, the Governor and the Finance Minister shall establish a close liaison through a mutual agreement with each other and shall keep each other fully informed on all matters which jointly concern the Bank and the Ministry of Finance.

The clauses related to functional and institutional autonomy proposed in March have also largely remained unchanged.

For instance, 46 B (6) says, “The Bank, with the approval of the federal government, may enter into an agreement or Memorandum of Understanding or any reciprocal arrangement, with any domestic or foreign regulatory or supervisory authority for the purpose of sharing and obtaining public and nonpublic confidential information notwithstanding the provisions of any other law for the time being in force."

A change is made in sub clause 7 of 46 B that now says, “The Bank shall be consulted prior to the introduction of any Bill by the federal government in the Parliament which may have a bearing on the functions of the Bank”. Earlier, the wording was that the “bank shall be consulted ex-ante on any proposed legislative act related to the bank”.

However, instead of directly submitting the reports to the parliament, now the governor will submit the reports to the standing committee of the Parliament. But at another place in the bill, the Governor has been authorised to present the reports to the Parliament.

Protection of Actions

The government has withdrawn the proposed immunity from the NAB and FIA laws to the governors, deputy governors, board directors, including sitting ones and those who have already retired or completed their terms of the offices.

A change has been made with regard to the SBP governor representing the country abroad. Now, the governor and deputy governors shall only represent the bank externally in person or through a nominee. The earlier proposal was that the Governor will also “externally” represent “the government and the Parliament” which has now been withdrawn.

The governor will have to appoint his successor during foreign visits in writing –a clause that is better than the earlier proposal.

 

Published in The Express Tribune, December 24^th, 2021.

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