The Ministry of Finance stated on Friday that the amendments proposed to the State Bank of Pakistan (Amendment) Bill were in line with the international best practices and aligned to the ground realities in Pakistan.
In a detailed clarification about the controversial bill, the Ministry said the National Accountability Bureau (NAB) and the Federal Investigation Agency (FIA) would have full jurisdiction to investigate the State Bank of Pakistan (SBP) officials in criminal and corruption-related matters.
It added that indemnity was being proposed for actions taken in good faith so that where due care and due process were followed, officials were not afraid to take action. Similarly, all major policy decisions of SBP would continue to be made by the Board of Directors or the Monetary Policy Committee (MPC), constituted by the federal government. In fact, it maintained, additional checks and balances on the management of SBP were being added under the proposed amendments.
Addressing the concerns about the central bank becoming “a state within the state”, the Ministry clarified that SBP would continue to be a public institution that is owned by the government and works for Pakistan only and to deliver the best outcomes for Pakistani citizens within the mandate given to it by the government.
It further said that key officials of the SBP will continue to be appointed by the federal government, as is the current practice.
It further said that SBP will no longer focus on growth but only inflation. It added that focusing on price stability as the primary objective is sensible since inflation is one of the variables that the central bank can influence directly through its tools.
Addressing the concern that curbing central bank lending to the government will create hardships for the people, the clarification said that borrowing from the central bank has also contributed to a lack of fiscal discipline, low revenue generation in the form of one of the lowest tax-to-GDP ratios in the world, repeated booms and busts and the need for repeated assistance of International Monetary Fund (IMF).
It said that government borrowing from the central bank is equivalent to printing money that leads to inflation which in turn causes the currency to depreciate and an increase in the current account deficit.
It added that to curb these harmful tendencies, most countries have included legal provisions to limit government borrowing from the central bank. In most advanced countries, half of emerging markets, and around one-fifth of developing countries, central banks cannot finance the fiscal deficit.
“In light of Pakistan’s history, a similar restriction [on borrowing from the central bank] would be beneficial, by leading to lower inflation, greater fiscal discipline, increased efforts to raise the tax-to-GDP ratio, and less balance of payments crises in the future,” it said.
Addressing the concern that the bill will lead to policies that undermine those of the government, the ministry said “a new mechanism for coordination is being proposed between the Finance Minister and the Governor [State Bank], under which they would establish a close liaison through a mutual agreement and keep each other informed of matters that jointly concern the Ministry of Finance and the State Bank.”
Quashing the accusations that the bill is an international conspiracy, it clarified that this is not the first time the State Bank Act is being amended. Major revisions were previously made using a similar process in 1994, 1997, 2012, and 2015. The current proposed amendments are a continuation of that practice to modernize the central bank in light of domestic realities, best international practices, and international experience.
The finance ministry also rejected the impression that the priority of the central bank will be repayment of external debt, to the detriment of the domestic economy and resources for development.
Opposition lawmakers had likened the bill, coupled with the Finance (Supplementary) Bill 2021, akin to surrendering the economic sovereignty of the country. Approval of both the bills is necessary to ensure Pakistan’s sixth review of the $6 billion Extended Fund Facility (EFF) is cleared by the IMF’s Executive Board, scheduled to meet on January 12.
