The federal Cabinet has approved the State Bank of Pakistan (SBP) Amendment Bill, 2021, which aims to reduce government borrowing for the central bank in accordance with the International Monetary Fund (IMF).
The proposed modifications in the Act will push the SBP’s goals, improve its institutional autonomy in achieving them, and increase its accountability.
The SBP Amendment Act 2021 is a continuation of the Central Bank’s modernization process. The proposed Act revisions aim to clarify the SBP’s goals, improve its functional and structural flexibility, and increase its accountability in meeting desired objectives.
The suggested changes are not based merely on worldwide best practices in central bank regulation; they also take into account the ground realities at home.
According to a report presented to the Cabinet on the SBP Amendment Bill, international experience and economic literature have shown that countries with independent and accountable central banks have lower inflation and higher financial stability over time.
It has been recommended that quasi-fiscal activities (defined as ‘monetary actions carried out on behalf of the government’) be phased out. Refinancing facilities, which the SBP has utilized to help underserved sectors get credit, are still allowed.
In principle, there is limited government borrowing under the existing SBP Act, 1956, but it has now been proposed that there should be no additional government borrowing from the SBP. In fact, borrowings by the government will be completely prohibited.
Moreover, it was also suggested in the meeting that the government abolish the Monetary and Fiscal Policies Coordination Board. It has been proposed that the Governor of the SBP and the Minister of Finance maintain a strong working relationship and keep each other informed about any issues that affect both the central bank and the Finance Division.
Historically, it was the State Bank of Pakistan Act, 1956, that formalized the SBP’s role in the country. Since then, the Act has been changed multiple times to account for changes in the world economic theory, including calling for central banks to play a more independent role. It was significantly revised in 1994, 1997, 2012, and 2015.
