The State Bank of Pakistan’s amended Bill-2021 including the proposal for a new board of directors deserves some comments. It seeks to get the mandate to keep administrative and management powers which will also include the authority to formulate exchange rate policy. This proposed amendment has tried to define the objectives of the SBP itself by elaborating that the primary objective of the central bank is to achieve and maintain domestic price stability. There can hardly be any disagreement about the SBP’s potential contribution to the stability of the financial system of the country, but it is the government’s general economic policies that should be aligned to foster development and utilization of productive resources. The amendment also proposes abolishing the Monetary and Fiscal Coordination Board MFCB). This board currently plays its role under the chairmanship of the minister for finance with the representation of various ministries. Then there is the question of the board of directors itself which shall comprise the SBP governor and eight non-executive directors (NED), with one NED coming from each province. Other NEDs are proposed to be eminent professionals from the fields of accountancy, banking, economics, finance and others.
These changes appear to have been spurred for the revival of the IMF programme. The existing law governing the SBP was passed into an act in 1956 and since then no major changes have been incorporated into it, despite the IMF’s attempts to suggest revisions to it in the past. An important change will be to extend the tenure of the SBP governor and deputy governor from the existing three years to five years, with an eligibility option for another reappointment for one more term. An important function of the proposed board will be the formulation of the exchange rate policy and the regulatory framework will be applicable to the regulated entities under the Act and any other law administered by the bank. The most important aspect of this matter is the issue of absolute autonomy to the SBP. It aims to free the bank from responsibilities of supporting economic growth and providing budgetary loans. This has been one of the primary expectations of the IMF before the revival of the stalled IMF programme that Pakistan wants to avail.
It is good that the new bill confines the bank's primary objective to be domestic price stability. Perhaps the inclusion of an inflation target would be beneficial to make the bill more people friendly. As we have seen, whenever the IMF programme springs to action, people suffer from rising inflation. We have seen in the past that the SBP has on multiple times failed to ensure price stability, and for that purpose there must be some accountability mechanism in place. It is noteworthy that there are about 30 conditions of the IMF that the government is trying to meet, and this revision of the SBC Act is just one of them to revive the stalled $6 billion IMF programme. Another condition was the withdrawal of around 80 income tax exemptions. The support to economic policies will remain a ‘tertiary objective’ rather than a primary one for the SBP. One disturbing proposal is about immunity from NAB and the FIA. Overall, the bill appears to be well-intentioned but its implications should be carefully considered.
