The debate about SBP bill

The ongoing media debate on State Bank of Pakistan’s (SBP’s) autonomy lacks professional argument/ debate. Most participants are merely showing their displeasure over the proposed bill instead of helping the common man to understand the crux of the matter. The ongoing conversations have surely confused many readers and viewers.

It has become a mystery that despite all the criticism by the financial experts for decades blaming former finance ministers/politicians for interfering in SBP’s functioning, which is the cause of all the economic mess, have suddenly shifted gears and are driving in reverse.

It is understandable if one disagrees with the concept of independent central banks. Everyone has the right to either agree or disagree with the bill. But why is a healthy debate/argument on the subject missing?

It is now well known that it is not an easy task to rejuvenate an economy that has lost momentum owing to a variety of reasons. Hence the need to correct it at some point. The truth is that since March 16, 1965, Pakistan has borrowed from the IMF as many as 21 times so far. It was only once that the country did not draw SDR 25 million that was offered. It happened in 1958. This means until September 2016, Pakistan has availed SDR13.722 billion. The present government, too, has borrowed from the IMF. The question is why despite continued borrowing by almost every elected government, the various macroeconomic fundamentals and other parameters failed to revive?

For decades, every government claimed extraordinary GDP performance and putting all the blame for economic ailments on its predecessors. I strongly believe GDP is only a rough economic benchmark indicator/estimate as it does not cover many important economic activities such as human well-being, standard of living that is connected to happiness, health, education or many more out of market activities, as significant part of our economy is undocumented. With regards to SBP independence, the question in everyone’s mind would be what relationship SBP autonomy has with price stability or targeting sufficiently low and stable inflation, so that it does not influence the economic decisions.

Central Banks (cBs) globally put their best effort when making judgments, but they can’t be correct every time. This is why when the market is erratic or crosses its target CBs’ either intervene or use monetary tools to nudge/drive market activity back to its desired levels.

Political threats to CBs’ independence constitute a common phenomenon the world over. This phenomenon is, therefore, not something unique in Pakistan. The heat is felt all over the globe. We often witness frequent changes in Turkey. Heads of the Central Bank of the Republic of Turkey (CBRT) were replaced in quick succession. In recent times in India, RBI faced similar issues. In the UK, Mark Carney, the BoE governor, had tough times facing criticism from pro-Brexit politicians for supporting exit from the European Union. ECB’s Mario Dragi was bashed by the Germans for his ultra-loose monetary approach that paid a dividend in the end. Earlier, Donald Trump too was unhappy with Jerome Powell’s hawkish stance, but the Fed did not succumb to political pressure.

In my view, Pakistan’s central bank, too, is faced with very tough conditions and liquidity management is an extremely difficult task. If we look at our historical trend of economic data of the past couple of decades, it will tell us that we have become addicted to government borrowing as the pace of growth of domestic borrowing is much faster than external borrowings. On cash basis (stocks) the net government budgetary borrowing from SBP is of Rs 6.455 trillion and from schedule banks is of Rs 7.015 trillion. Look at the circular debt figure, which is well over Rs2.4 trillion mark. Unfunded debt is of Rs 3.668 trillion. Open Market Operations (OMOs) liquid injection reaching of Rs 1.629 trillion figure. Currency in circulation has reached Rs 6.634 trillion and Bank Advances of Rs 8.527 trillion against Bank Deposit of Rs 17.256 trillion.

What must be concerning is that the proposed SBP Amendment bill granting autonomy will clog the pipeline and easy access to funding. This could put immense pressure and responsibility in all government departments to make collective efforts to generate income to support the economy.

Some of the issues that need discussion are ‘share capital’, no new government borrowing, quasi-fiscal operations, actions in good faith and indemnity and tenure of governor.

Let’s discuss a few important and salient features of proposed changes.

No New Government Borrowing

• There is a lot of talk about end of quasi fiscal operations. There is a fear that passing the bill will prohibit borrowing funds in emergency situations that could possibly lead to an extreme crunch or a system collapse. I have several times raised this topic that for almost a decade, SBP despite its tighter policy stance has been providing ‘Helicopter Money’ through OMO, and will continue to provide support when there is such urgency. The SBP’s window is already available and active. At the time of emergency, SBP can effectively activate its monetary tool to provide liquidity through its OMOs.

Good Faith and Indemnity

There is a big discussion and concern about appointment of SBP Governor & Deputy Governors, which will be done by the government. Similarly, the three members of Monetary Policy Committee (MPC), too, will be appointed by the government. In other words, SBP’s Board of Directors will consist of 11 members after the induction of three MPC members into it. Yes, if SBP gets the autonomy, it will have to own and shoulder all the financial sector responsibilities that pertain to price stability, inflation and all monetary matters. They will be answerable to the board of directors, which will be appointed by the government.

I do not see SBP’s excessive power as a threat. In recent times, the Reserve Bank of India, which is considered one of the most powerful central banks, saw two of its bosses Raghuram Rajan and Urjit Patel quitting before the expiry of their terms. Rajan was blamed for extending loans on phone calls and his hawkish approach. Similarly, Patel was under pressure due to liquidity and cash flow issues and was forced to make an early exit.

CONCLUSION

I am in favour of an independent central bank as Pakistan’s economy is faced with huge structural problems. The SBP could be partly blamed for its ‘friendly’ policies, but since it has no other choice/option, it is forced to entertain requests from the government and honour commitments.

We have a history of outside interference and dominance by various ministries, as a result of huge fiscal deficits and out-dated export policies. This is why ultimate pressure tilts towards indirect tax collection which is a two-third of the total collection. Tax to GDP ratio has plunged to the lowest in the region. The bank deposit to advance ratio is below 50% and breaching of 60% debt limitation set by the Fiscal Responsibility and Debt Limitation Act (FRDL); it is now close to 90%.

Inflation is another big cause of concern. Pakistan’s 5 decades’ historical policy rate averages well over 8%. With autonomy, SBP’s noose will be tightened around tax evaders. SBP will hold banks responsible for poor or lending without collateral. SBP will tighten its grip on AML/CFT issues by further implementing tighter rules and regulations, which is FATF’s demand.

(The writer is former Country Treasurer of Chase Manhattan Bank)

Copyright Business Recorder, 2021