The SBP’s autonomy

If you are enraged by the proposed autonomy of the State Bank of Pakistan (SBP), let me add more fuel to the fire. The SBP needs even more autonomy than the one pending for approval in the parliament.

In order to come at par with best international practices, independence from explicit control of government functionaries and other people with market affiliation is an ideal for central banks around the globe. To accomplish that goal, the proposed SBP Amendment Bill 2021 intends to amend the State Bank of Pakistan Act, 1956.

First of all, the amendment Bill aims at refining the aspirations of the Bank. The existing objectives of the Bank are reflected in the preamble of the Act. A bare reading exposes the ambiguity. It says that the Bank’s objectives are “to secure monetary stability and fuller utilization of [the] country’s productive resources.” This ambiguity is a roadblock to any meaningful achievement, and more than that it is fair enough to insulate the bank against serious accountability. The proposed amendment to SBP Act sets to incorporate clear targets and quantifiable objectives – price stability, financial stability.

Similarly, the existing tasks of the Bank are scattered throughout the statute which hinders the appropriate exercise of some functions. Likewise, the SBP has been entrusted with certain fiscal operations. The new amendment intends to refine and collate the functions in one chapter and do away with the quasi-fiscal role of the Bank.

Moreover, the new bill proposes to increase the authorized and paid-up capital of the Bank which is Rs100 million at present. The new paid-up capital threshold of Rs100 billion is expected to ensure sufficient financial resources. Capital cushion is good for a central bank’s standing in the market. Banks facing losses or negative values are susceptible to external interference/influence. In this regard, even if the increase in authorized and paid-up capital is an accounting device, it would go a long way in enabling the Bank to maintain its operational independence.

The proposed legal arrangements also seek to get rid of government borrowing. When the government borrows from the SBP, it does not borrow in the practical sense rather it makes the Bank to create money, which has a direct impact on purchasing power. This fiscal dominance spoils the performance of the Bank on other counts too.

Similarly, the new changes also strive to discontinue quasi-fiscal operations (QFO) of the central bank which jeopardize the Bank’s core function. QFOs include subsidized lending, credit ceilings, rescue operations, exchange rate guarantees, etc. Although a little bit of QFOs will still remain with the Bank, the main segment of existing involvements will be cut off.

Besides, the proposed amendment ventures to consolidate the functional and institutional autonomy of the Bank by establishing a dual-way link between the SBP governor and the minister for finance. Both offices will coordinate in a structured manner. The amendment bill lays off the secretary finance from certain bodies of the Bank.

The most contentious issue in the ongoing debate is the protection proposed for officials of the Bank. The amendment bill suggests that the officials of the Bank will remain immune to civil or criminal proceedings for actions and omissions done in good faith in the performance of their duties. The immunity is not blanket. Given the role of the Bank officials and political environment in our country, this is not at all a bad idea.

The intended Bill also endeavors to enhance transparency and controls in the administration of the Bank by establishing an executive committee, which will consist of governors, deputy governors and other officials of the bank, and will make the policy decision relating to the Bank’s functions and administration.

Similarly, the proposal under consideration devises the manner in which the audit of the affairs of the Bank will be conducted. This function should have rather been delegated to the auditor general of Pakistan, being a specialist agency for the purpose. Moreover, for the first time, a department of internal audit has been framed for the institution. Conflict of interest provisions have been expanded to include the governor, deputy governor, directors and ex-officio members of the Monetary Policy Committee, a key body in the Bank.

Lastly, the amendment intends to make the Bank accountable to parliament through periodic reporting requirements and appearance of Bank officials whenever required.

To conclude, the SBP Amendment Bill 2021 contains crucial changes which will not only change the way the Bank works but which also carry great promise. The ongoing noise belies the real justification for change. These proposals do not benefit the government in the short run rather the autonomy of the Bank puts the sitting government in a disadvantageous position. While it is heartening to know that people are taking interest in a highly technical and obscure matter of state function, the government should make more efforts to effectively address the information needs of the people in crucial public policy areas.

The writer is a public policy practitioner.