A Look at What’s Changed for Central Bank in Revised SBP Amendment Bill 2021

The federal cabinet recently approved the revised draft of the State Bank of Pakistan (SBP) Amendment Bill 2021 aimed at rebuilding the country’s cash reserve and giving the Bank complete control to perform its functions.

According to official documents seen by ProPakistani, the revised draft of the SBP Amendment Bill 2021 also gives the central bank unlimited autonomy and prohibits the government from borrowing from it.

According to official documents, the revised bill places a greater emphasis on accountability and balancing the central bank’s autonomy. The proposed amendments in the Bill suggest that domestic price stability is a fundamental goal of the SBP. To do so, the Central Bank will be guided by the government’s medium-term inflation target.

Supporting the government’s development program will be a tertiary goal for the SBP, and it will continue to assist the government’s economic growth initiatives as long as its primary goal of pricing and financial stability isn’t jeopardized.

Overall, 54 amendments inclusive of 10 new sections have been added to the SBP Act 1956.

Prohibition on Government Borrowing

In principle, the State Bank of Pakistan will not offer any direct credits to or guarantee any debts of the government, any government-owned entity, or any other public body as part of the proposed modification to prevent government lending.

On the other hand, the central bank, explains that no such limitation is contemplated in the SBP Act that would affect the government’s ability to issue sovereign guarantees. Furthermore, the proposed change does not place any restrictions on the government’s ability to borrow money.

The proposed revisions will have no effect on the government’s capacity to arrange incentivized financing/loans for small and medium businesses, start-ups, and the Naya Pakistan Housing Programme, among other things.

The bill also states that SBP will not purchase government securities in the primary market, which is where securities are first created and issued. However, the central bank may buy government securities on the secondary market, where they are traded among investors.

It is worth mentioning that government securities are debt instruments that a government sells to fund its daily operations as well as special infrastructure and military projects.

In order to bring fiscal discipline, the bill adds that the government must pay off its debt to the central bank according to previously agreed-upon schedules, with no rollovers permitted.

SBP Appointments

The proposed amendments in the Bill address conflict of interest in the appointment of members of the Monetary Policy Committee (MPC). It is recommended that no person designated under section 10A acts as a representative of any commercial, financial, agricultural, industrial, or other interest, or receives or accepts directives from such an interest, in relation to obligations to be performed under this Act.

The governor, deputy governors, non-executive directors, and members of the MPC will be appointed for five years and will be eligible for one re-appointment for another five-year term after their initial term ends. The current governor and deputy governors are eligible for re-appointment for another five-year term, according to the bill.

In addition, every such person must appropriately disclose to the Board any personal, commercial, financial, agricultural, industrial, or other interest that he or any dependent member of his family may directly or indirectly hold or be connected with and that becomes the subject of consideration by the Board, and must recuse themselves from any Board deliberations and voting relating to such cases of conflict of interest.

Share Capital and General Reserve

The central bank will have significant financial resources. The authorized capital of the bank will be five hundred billion Rupees, divided into five billion shares of one hundred Rupees each. The authorized capital may be increased by the resolution of the Board, subject to the approval of the federal government.

The paid-up capital of the Bank will be one hundred billion Rupees, divided into one billion shares of Rs. 100 each, which will be made up through issuance of bonus shares by capitalizing of profits or general reserve or through subscription of shares in cash by the federal government. The paid-up capital and general reserves of the Bank will increase to eight percent of its monetary liabilities through an allocation from the distributable profit.

The State Bank of Pakistan (SBP) Amendment Bill 2021 is essentially within the fiscal purview of achieving near-term economic targets established by the government and the International Monetary Fund (IMF).

Pakistan will present the sixth review of the authorities’ reform program supported by the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) on 12 January 2022.