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Finance ministry iterates State Bank’s autonomy


July 2, 2020

ISLAMABAD: Ministry of finance on Wednesday dispelled the impression about its interference into interest rate decision after an unscheduled monetary policy meeting by the central bank was linked with a rate cut advantage to the government in domestic debt auction.

A ministry’s spokesperson said auction calendar is announced every month for next three months – on rolling monthly basis – to raise debt through issuance of government securities, including treasury bills, Pakistan investment bonds (PIBs) and sukuks.

On April 10, the finance ministry announced schedule of auction of government securities, which was also confirmed on June 16 and according to which the instant auction was scheduled for June 24. The monthly auction of PIBs was held as per the preannounced schedule. This was followed by an unscheduled emergency meeting of the State Bank of Pakistan’s (SBP) monetary policy committee (MPC) on June 25 in which the policy rate was reduced by 100 basis points.

“By suggesting that the SBP should have either held the MPC meeting earlier or informed the finance ministry to delay the auction to take advantage of the reduction in policy rate, an incorrect impression is being created,” the spokesperson said in a statement. “(This) is grossly incorrect that ministry of finance and SBP have caused a loss to the government exchequer. Both the agencies are working in a professional manner and in their own domain.”

Since mid-March the SBP delivered a cumulative reduction of 650 basis points in the benchmark interest rate to 7 percent with the last cut was announced in late June without preannouncing the schedule as per the standard procedures.

Considering the economic impacts of coronavirus crisis, the State Bank shunned its usual practice of holding MPC meeting every two months. But, the announcement schedule was still announced.

The ministry’s spokesperson also rejected that PIBs auction was linked with re-profiling of debt obtained from the SBP.

“Borrowing is a function of ministry of finance, whereas setting the policy rate is the function of the SBP,” said the official. “International best practices require the two agencies to act independently and professionally. If these agencies start influencing each other’s decisions, then monetary policy can become hostage to the budgetary/borrowing considerations and vice versa.”

On re-profiling and retirement of debt obtained from the SBP, the spokesperson said the government had decided at the end of FY2019 to convert short-term debt of Rs7.7 trillion from the SBP over the years into long-term debt and to be retired over 10 years.

“Accordingly, a policy decision was taken to terminate borrowing from the SBP,” he said. “This decision has been appreciated by the international credit rating agencies and multilateral institutions, such as IMF (International Monetary Fund) as it reflects government’s commitment to greater fiscal discipline, macroeconomic stability and financial market development.”