The federal government has prepared a draft bill proposing complete autonomy for the State bank of Pakistan (SBP). Once approved, the central bank will be completely freed of all responsibilities of supporting economic growth and providing budgetary loans.
This move comes as part of efforts to revive the stalled International Monetary Fund (IMF) program, Express Tribune reported on Tuesday.
The draft ‘SBP Amendment Bill, 2021’ details that the central bank’s primary objective will be domestic price stability. However, there is no targeted inflation given by the federal government, and no accountability mechanisms have been put in place in the bill in case the SBP fails to maintain price stability.
According to the SBP bill, supporting economic policies has been declared a “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. The SBP’s former officials have also been provided with immunity from the NAB and the FIA.
In another related and major proposal, the government has also proposed the abolition of the Monetary and Fiscal Policies Coordination Board in an effort to remove the “risk of undue political influence over the SBP’s monetary policy”. This was stated by the Ministry of Finance in addition to declaring that the bill in concern also proposes to eliminate the SBP’s powers to run quasi-fiscal operations.
The federal cabinet will take up the draft bill for approval in its meeting scheduled to be held on Tuesday (today). Making the central bank fully autonomous is a pre-condition to revive the stalled $6 billion IMF program in addition to around 30 more policy conditions.
Another of these conditions by the IMF is that the government withdraws 80 income tax exemptions. The government will also present the finance bill in the Senate today (Tuesday) for that purpose.
In April last year, the Cabinet Committee on Legislative Cases (CCLC) deferred the approval of the bill due to a difference of opinion between the SBP and the Ministry of Finance over the extent of autonomy. This time, however, the ministry has sent the draft bill directly to the federal Cabinet while bypassing the CCLC. It has also requested the Cabinet to waive the CCLC approval requirement citing the “urgency” of the matter.
Some of the salient features of the proposed bill are as follows:
The current dual objectives of the central bank of regulating the monetary and credit system and fostering the growth of central bank have been replaced with the primary objective of domestic price stability and the tertiary objective of fostering development and fuller utilization of the country’s productive resources.
The central bank will have the freedom to determine and implement monetary policy, and formulate and implement the exchange rate policy. Also, in the future, the federal government cannot make legislation without consulting the SBP.
It has been proposed that the authorized capital of the SBP be increased to Rs. 500 billion and the paid-up capital to Rs. 100 billion. It has also been proposed that the federal Secretary of Finance be removed from the SBP board. However, the SBP Governor, Dr. Reza Baqir, will remain the Chairman of the Board.
Some prohibitions have also been placed on government borrowing. The draft bill states that the central bank will not extend any direct credits to or guarantee any obligation of the government, government-owned entity, or any other public entity.
According to the proposed draft bill, the SBP will provide the refinance facility to only the financial institutions The central bank will not purchase or sell bills of exchange and promissory notes, nor will it purchase the government debt in the primary market. However, it can purchase them from the secondary markets.
Also, the government will have to retire all the debts that it owes to the central bank at the already-agreed schedules, and no rollover will be allowed.
Regarding the appointments in the central bank, the draft bill outlines that the governor will be appointed by the president for a period of five years, which may be extended by another term of five years. The current term is three years.
No member of the parliament, the provincial assembly, or a political party can be on the board of the SBP.
The SBP can provide a short-term facility to a troubled commercial bank if the federal government provides guarantees to the SBP for giving such a loan.
The SBP Governor will submit an annual report before the Parliament regarding the achievement of the bank’s objectives, the conduct of the monetary policy, and the state of the economy and financial system.
According to the proposed draft, the government or the quasi-government entities will not have the authority to approve, suspend, annul, or interfere with the management of the bank and of the members of the board, the executive committee, the MPC, or the staff of the bank. Additionally, the SBP employees cannot be instructed by the federal government.