ISLAMABAD: The proposed changes in the State Bank of Pakistan (SBP) Amendment Bill have triggered a heated debate across the country while some experts, including one politician, have extended support for the objective of targeting inflation as the sole mandate of the central bank.
Interestingly, Pakistan Muslim League (Nawaz) MNA Daniyal Aziz told The News on Tuesday that “after enactment of SBP Act, the government cannot lie about inflation control being a provincial responsibility and they will have to take responsibility of inflation they are creating as government policy.”
He further said previously, governments used the SBP to hand out subsidised credit to the rich and hide behind profiteering and hoarding when the poor complained about inflation.
In background discussions, experts were of the view that the proposed SBP bill clearly envisages that the primary objective of the central bank is price stability or low inflation. Now the Monetary Policy Committee (MPC) will have to work to achieve the objective of achieving low inflation, through the State Bank of Pakistan for maintaining inflation resulting in erosion of the purchasing power of poor and then keeping the discount rate low to provide subsidized credit to rich. Through this new mechanism now, the party for the elite and rich will be over.
The National Price Monitoring Committee (NPMC) at the federal level would either become redundant after enactment of the fresh SBP Act because Minister for Finance, who chairs its meeting, would have no mandate to ensure price stability or it would have to re-define its mandate.
Another expert opined that the NPMC would have to take responsibility for explaining reasons for rising inflation through government policies to reward the rich who possessed access to the subsidized credit and, on the other hand, abandon the practice of arresting poor shopkeepers through the use of state force.
Sajid Amin Javed, an economist from SDPI, told this scribe that the SBP should have full independence and autonomy as it should be free in conducting its monetary policy and exchange rate adjustments. He said that whenever the government intervened, it caused economic losses from a medium to long-term basis. In principle, the SBP should be free from any political influence, he maintained.
There is an element of confusion here in our debate as the autonomy of the SBP does not mean that the government should have no control over it, he said and added that the accountability should be given to the parliament. When the government sets the inflation target, then the SBP should have operational independence to achieve the objective. The autonomy of SBP does not mean that it should be given absolute independence, he added.
The second question arises whether the SBP should go for the sole mandate of price stability or not as some experts opined that by pursuing the sole mandate, it would hurt the growth path. He said that every policy has a primary objective as for example the social policy looks after the neglected and poorest segments of the society but this policy could not focus on growth, deficits and other objectives.
Every policy possessed fundamental objectives and then sub-objectives come in, so the price stability should remain the primary objective of SBP which means low and stable inflation. He said that there was a need to bring clarity to define what was low and stable inflation in Pakistan. He was of the view that it would require to come up with secondary legislation as the SBP Amendment Act, if passed by the Parliament, would provide an overall framework and then the secondary legislation would be required to define price stability. The inflation target would be set by the government but it should be targeted at 5 percent and then it should be brought at 3 percent over the medium term. If the target was not fixed at 5 percent, then there is no benefit to go on inflation targeting. The SBP should keep social aspects for setting inflation targeting.
Through secondary legislation, he proposed that there should be clear-cut inflation targeting over the medium basis 'in writing', so that the SBP could be held accountable. It should not be vague as core inflation could be set as targeting inflation. The weak area of proposed legislation was that there was no clarity on how the accountability would be done in case of not achieving targeting inflation. He proposed that the MPC members voting for the fixation of interest rate should be made public, so accountability could be done in case of any failure.
He said that there should be no second term for governor or deputy governors because it would be a conflict of interest. One term could be increased from 3 to 5 years but there should be only one term, he concluded.