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SBP ‘ABSOLUTE AUTONOMY’

Q# In the recent debates on national and international electronic media! The Critics claimed that
the government was enacting such a law which would hand over the State Bank of Pakistan
(SBP) control to the International Monetary Fund (IMF) and other international financial
institutions.

The SBP would not be accountable to the parliament, the prime minister or any institution of the
country and it would only be answerable to the international institutions. They said that National
Accountability Bureau (NAB), FIA or any other institution would not be able to ask the SBP
governor and other officials for any corruption.

The SBP will be obliged to provide all kinds of information regarding the economy to the IMF,
World Bank, and other external financial institutions. To date, the IMF has not passed such a law
in any country.

Many have raised fears about its long-term impact not only on the economy but also on the
country’s overall sovereignty.

On the other hand, those who support further autonomy contend that these measures would
increase transparency, make monetary policy more effective and freer of political influence. This
independence would mean making the government fiscally responsible through its borrowing
restrictions.

Given the information, are you in the favor of absolute autonomy of SBP? Give your comments
with logical arguments.

Answer:

The International Monetary Fund and the World Bank were both created at an international

conference convened in Bretton Woods, New Hampshire, United States in July 1944. The goal
of the conference was to establish a framework for economic cooperation and development that
would lead to a more stable and prosperous global economy. While this goal remains central to
both institutions, their work is constantly evolving in response to new economic developments
and challenges.

The IMF’s Mandate. The IMF promotes monetary cooperation and provides policy

advice and capacity development support to preserve global macroeconomic and financial
stability and help countries build and maintain strong economies. The IMF also provides short-
and medium-term loans and helps countries design policy programs to solve balance of payments
problems when sufficient financing cannot be obtained to meet net international payments
obligations. IMF loans are funded mainly by the pool of quota contributions that its members
provide. IMF staff are primarily economists with wide experience in macroeconomic and
financial policies.

The World Bank’s Mandate. The World Bank promotes long-term economic development and
poverty reduction by providing technical and financial support to help countries reform certain
sectors or implement specific projects—such as building schools and health centers, providing
water and electricity, fighting disease, and protecting the environment. World Bank assistance is
generally long term and is funded both by member country contributions and through bond
issuance. World Bank staff are often specialists on particular issues, sectors, or techniques.

Framework for Cooperation.

The IMF and World Bank collaborate on a routine basis and at many levels to assist member
countries, including joint participation in several initiatives. The terms for their cooperation were
set out in the 1989 concordat and subsequent frameworks to ensure effective collaboration in
areas of shared responsibility.

Pakistan Muslim League-N (PML-N) Secretary General Ahsan Iqbal Friday said claimed the
government was enacting such a law which would hand over the State Bank of Pakistan (SBP)
control to the International Monetary Fund (IMF) and other international financial institutions.

 Fiscal Policy Transparency: The IMF’s Fiscal Transparency Code, part of the IMF's Fiscal

Transparency Initiative, is the international standard for disclosure of information about
public finances. It was overhauled in 2014 to advance international fiscal transparency
standards and expanded in 2019 to integrate resource revenue management issues. It
comprises a set of principles built around four “pillars”: (i) fiscal reporting; (ii) fiscal
forecasting and budgeting; (iii) fiscal risk analysis and management; and (iv) resource
revenue management. All pillars were finalized, following public consultation and testing in
countries. The Fiscal Transparency Handbook provides detailed guidance on Pillars I-III.
 Central Bank Transparency: The IMF’s Central Bank Transparency Code is the
international code allowing central banks to map their transparency practices, with the
purpose of enhancing their accountability and – ultimately – their policy effectiveness. The
CBT, approved by the IMF Board in July 2020, replaces the earlier Monetary and Financial
Policy Transparency Code (MFPT). The CBT is founded on a five-pillar framework:
transparency of central bank (i) governance, (ii) policies, (iii) operations, (iv) outcome, and
 (v) official relations. Each of these pillars consists of principles, as well as detailed practices
(core, expanded, comprehensive). The CBT website provides more details, including the
CBT Guidance Note and Review Template (which is used both for self-reviews, and IMF
staff reviews of central bank transparency).
The federal government has agreed to grant absolute autonomy to the State Bank of Pakistan
(SBP), whereas the federal cabinet will take up the SBP Amendment Bill for approval in its
meeting today.

According to a report by the Express Tribune, the central bank’s primary objective under
the SBP Amendment Bill, 2021, would be to ensure domestic price stability as it would be
free from the responsibilities of supporting economic growth and providing budgetary
loans to revive the stalled International Monetary Fund (IMF) programmer.

The bill states that supporting economic policies has been declared as “tertiary objective”
of the central bank, while the National Accountability Bureau (NAB) and the Federal
Investigation Agency (FIA) cannot investigate the SBP governor, deputy governors, its
executives and board and committee members. Former officials have also been provided
with immunity from NAB and the FIA.

Similarly in another major proposal, the Monetary and Fiscal Policies Coordination Board
has been proposed to be abolished, with a view to ending “risk of undue political influence
over the SBP’s monetary policy”, according to the finance ministry.

The bill also proposes the abolition of SBP’s powers to run quasi fiscal operations.

Commenting on the development, Bank of Punjab President and CEO Zafar Masood said,
“Some of the clauses are an absolute must. IMF or no IMF.”

Pakistan Muslim League-N (PML-N) Secretary General Ahsan Iqbal Friday said claimed the
government was enacting such a law which would hand over the State Bank of Pakistan (SBP)
control to the International Monetary Fund (IMF) and other international financial institutions.

Addressing a press conference here, he said that with the new legislation, the SBP would not be
accountable to the parliament, the prime minister or any institution of the country and it would
only be answerable to the international institutions. He said National Accountability Bureau
(NAB), FIA or any other institution would not be able to ask the SBP governor and other
officials for any corruption.

“If the prime minister of Pakistan can appear before NAB, then why can't the SBP governor?”
Ahsan said adding it was only to mortgage Pakistan's economy with the international institutions.
“Why are you trying to hide behind the high courts in foreign funding case? There is
contradiction in your words and deeds and your crimes are not ignorable,” he added. Nawaz
Sharif was declared a traitor when he had talked about setting the own house right in 2016. Had
his narrative been implemented at that time, the country would have not faced difficulties at the
FATF [Financial Action Task Force] later on, he added. He said only free, fair and transparent
elections could fix the present problems of the country.

Answering a question that the Pakistan People’s Party (PPP) was not following the Pakistan
Democratic Movement (PDM) policies, he said it (PPP) would go with the PDM at last. He said
the PDM power was intact and even if the PPP decided to part ways with it, the former would
send the government packing and establish a constitutional government in the country.
Answering another question, he said the PML-N would not negotiate with the incumbent
government because they did not have any mandate. “Our establishment, judiciary and leaders
should think why Pakistan is not running in a proper way,” he added.

Ahsan said we have no problem with the National Accountability Bureau (NAB) now because
“we have faced the worst NAB could do to us”. He said now it’s time that Imran Khan should be
concerned about it. “Imran Khan you must admit that you have been unable to run the
government, so you should resign and go home,” he suggested. Ahsan said that it was a tragedy
that a person had been installed who was trying to hide his incompetence by telling lies. He said
Imran Khan said that the previous government did nothing for education. He said the Malakand
University project was started in 2015 and two-thirds of the work on the project was completed
in the PML-N time.

How much autonomy should the State Bank enjoy has been a contentious issue.

As part of the financial reforms, pushed through by caretaker Prime Minister Moeen Qureshi in
1993, the authority to make monetary policy was given exclusively to the State Bank. Yet,
practically all the governments kept interfering in the monetary policies to promote their political
agenda.

They did this through various means. One primary tool was through the powerful Monetary and
Fiscal Policy Coordination Board (MFPCB), which is chaired by the finance minister and also
includes the finance secretary as a board member.

Originally, the intent was to have the board function as a coordinating body between the Ministry
of Finance and the State Bank, but its role expanded much beyond its original mandate.
Therefore, the board’s abolition was one of the structural benchmarks set by the IMF.
The government was not keen to do so and kept stalling. Through a press statement in May 2020,
the Ministry of Finance categorically rejected any demands to abolish the board but it had no
choice but to comply.

Other significant changes for the autonomy are surrendering government’s right to borrow from
the central bank to keep a check on deficit financing done through printing new money,
extending the tenure of the SBP governor from three to five years (renewable for another term)
to minimize political meddling and also bring it closer to international practice, and providing
immunity to State Bank officials for decisions taken in good faith.
There has been a jarring debate on the pros and cons of the proposed changes. Those opposing
them argue that the changes could free the State Bank from any accountability while giving it too
much power. They also contend that the deletion of the reference to “growth” in the preamble of
the existing SBP Act will make the SBP focus exclusively on price stabilization and not give any
attention to growth.

Another target of criticism is the restriction imposed on the government from getting loans from
the State Bank as it may increase reliance on borrowing from commercial banks. These
restraints, it is feared, would further crowd out borrowings by private investors.
On the other hand, those who support further autonomy contend that these measures would
increase transparency, make monetary policy more effective and freer of political influence. This
independence would mean making the government fiscally responsible through its borrowing
restrictions.

They disagree that there would be no accountability as the governor will be required to submit an
annual report to parliament regarding achievements of the bank’s objectives, the conduct of
monetary policy and financial stability.

Further, the Auditor General of Pakistan will continue its oversight of SBP operations.
Regarding indemnity for the bank’s personnel, they point out that it is a common feature of
international laws concerning central banks and is needed to ensure functional autonomy.

There is no doubt that short-term political agendas drive political governments, and monetary
policy is best conducted by a central bank that is independent of the elected government.
Nevertheless, it would be better to clarify some issues when the legislation is debated by
parliament.

The more important ones include how and who would determine the inflation rate. Should the
monetary policy focus on headline inflation (as is the current practice) or core inflation i.e.
excluding food and energy (as used to be the case previously)? Should the State Bank only be
targeting inflation or its role should be wider to also look at the nominal GDP growth (sum of
inflation and real GDP growth).

It may also be a good time to reform the process of selection of the governor, which has so far
been rather opaque. As a result, only one of the previous five governors could complete even a
single term of three years.

All in all, autonomy should not be overdramatized as is being done by some critics. It is limited
to three things, all of which are consistent with the international best practices – monetary policy
making, no free money to print and not having one individual at the Ministry of Finance
determining the exchange rate. Since the governor and deputy governors are appointed by the
government, there is no absolute autonomy.
The writer has served as Pakistan’s ambassador to WTO and as FAO’s representative to the
United Nations in Geneva