The IMF latest report has explicitly directed upon the improvement in the internal management of the central bank in addition to reemphasize on enhancing SBPs independence. The Fund is recommending a deeper involvement of the board and to attain independence, the proposal is not to have representation of the ministry of finance in the board.
It is spot on to have less influence of MoF on board as government treasury is the biggest stakeholder in the banking system. At this point, Secretary Finance is influencing the board owing to the fact all members are appointed by MoF and reportedly his point of view is not contested adequately. With government debt servicing cost soared by monetary tightening, there is an apparent bias in opinions of ministry representative.
The other interesting Funds advice is to develop an executive board with defined executive powers. Sources privy to central bank revealed that the Fund is asking to have two nominees from the board to look into day-to-day affairs of the bank, i.e. providing them administrative powers.
"SBP will establish a board committee to centralize and overseas risk management activities across the bank by end-January," stated the country report. IMF is converging to micromanaging the central bank, but it has not touched the issue of suspended monetary policy committee. The MPC used to have representations from the board as well as participation of independent economists and minutes of the MPC meetings were released.
It is interesting to see that how these new recommendations are going to influence the upcoming monetary policy which will probably be announced next Friday. The Funds staff stressed the SBP monetary policy should also focus on containing higher inflationary pressures on the horizon.
Monetary policy stance should be to forestall inflation and build reserves. The writing is clear to have a tightening stance to ensure positive real interest rates and have attractive interest rates differential to encourage capital inflows. "As foreseen in the original programme, inflation reduction will become an increasing focus on monetary policy in FY14/15," emphasized the mission.
Then the Fund picked the trend of higher exposure of SBP in foreign exchange derivates including future and swaps. By November end, SBPs exposure in these derivates increased to $3.45 billion against the last years average of $1.98 billion. The Fund asserted SBP to meet its quarter end permissible limits and reportedly December end targets have been met.
Since the second review will start in a few days time, and given that a few of the targets have been breached, government and central bank will have to be vigilant in implementing structural reforms to avail the waivers on a few key conditions. There is a possibility of reconstitution of central bank board soon without anyone from MoF and then the board may elect two executive members. Then the chances of having a tightening in monetary policy are high despite ease in inflation during December.
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