Notes on: State Bank of Pakistan (Amendment) Act, 1956

A Bill:

State Bank of Pakistan (Amendment) Act, 1956

General

These notes provide comments on the bill proposed as State Bank of Pakistan (Amendment) Act, 2021. This bill proposes to amend the State Bank of Pakistan Act, 1956.

Pakistan is under the International Monetary Fund program. This programme required some changes in the regulations relating to the central bank.

Therefore certain major changes were required in the State Bank of Pakistan Act, 1956.

This act will determine the future course of operations of the state bank of Pakistan and relationship of the central bank with the executive arm of the government i.e. the Ministry of Finance. A new model is being adopted which is considered to be in line with the central banks of developed countries. It is our view that peculiar circumstances in Pakistan require concentrated analysis on this matter.

The perception of autonomy of the central bank has been addressed in this Act, however, as stated in the following paragraphs this matter needs to be examined within the perspective of economic ground realities of the country. Our analysis does not see major changes from the present set up. Nevertheless practical application of some of the provisions will decide this matter over time.

Certain important changes have been discussed in the following paragraphs.

Preamble of the Act

The preamble to the Act has been substituted and the subjects of ‘domestic price stability’ and ‘contribution to the stability of financial system’ have specifically been emphasised. Furthermore, the term price stability has been defined as maintenance of low and stable inflation guided by the government’s medium-term inflation target.

There can be specific reasons for the insertion of this subject in this particular manner in the Act however the insertion of the words ‘guided by the government’s medium term inflation target’ reflect the ultimate responsibility of the subject to the government not the central bank.

In the particular circumstances related to Pakistan, the subject of price stability and inflation if required to be emphasised has to take into account the undocumented financial sector representing the main cause of inflation. That system runs a parallel economy leading to unmanaged economic consequences.

Objectives and Functions

Two new sections have been inserted under the heads ‘objectives’ and ‘functions’ of the bank.

Fuller utilization of Pakistan’s productive resources has been added to the objectives. This is essentially the role of the Federal Government.

Within functions, the two primary roles are:

• Determine and implement monetary policy; and

• Formulate and implement the exchange rate policy.

Board of Directors

Composition of the Board of Directors has not been changed. However a major change has been made whereby the Secretary Finance Government of Pakistan who is an ex-officio director has been made a non-voting member of the Board.

This is a very important change with respect to the notional concept of autonomy of the central bank. It had been presumed in the past that Secretary Finance being a Board Member had an overpowering position. This is a new experience and results will emerge over time.

The Board’s function, in principle, is of oversight. Furthermore there is no role of the Board in relation to the monetary policy which will be handled by the Monetary Policy Committee.

Prohibition on Government borrowing

This is an important change. Under the amended position the Bank shall not extend any direct credits to or guarantee any obligation of the government or any government owned entity.

Nevertheless the existing obligation at the time of enactment of this act will continue and the same can be rolled over.

This specific provision therefore means that in future all government borrowings will have to be made from banks and the public at large in the form of treasury bills and other such securities.

Monetary Policy Committee

The most important change has been made with respect to the Monetary Policy Committee (MPC).

A very important and relevant change has been made with respect to the role of MPC. Previously MPC was required to:

formulate, support and recommend the monetary policy, including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in Pakistan…..

Under the amended status the words ‘support and recommend’ have been omitted. This therefore means that now MPC is the sole authority to decide the monetary policy. Its role has been extended. As discussed earlier the Board is not involved in the functions of MPC.

The external members of MPC shall be appointed by the Federal Government upon the recommendation by the Board

Abolition of the Monetary and Fiscal Policies Coordination Board

The Board constituted under Section 9 B has been abolished.

Term of Office

The term of office of the Governor and Deputy Governors has been extended from three to five years.

Functional and institutional Autonomy

A new Section has been placed in the Act laying down specifically that the central bank will be functionally and institutionally independent.

Liaison with the Federal Government

Within the perspective of the autonomy of the central bank a specific section has been introduced under the title of liaison with the government. The text of the section is as under:

9G. Governor and Minister of Finance to establish liaison.- The Governor and the Finance Minister shall establish a close liaison through a mutual agreement with each other and shall keep each other fully informed on all matters which jointly concern the Bank and the Ministry of Finance.”.

In this section an obvious has been stated. In practical terms there can never be a situation where there is no close liaison between the Government and the central bank. It can therefore be stated that the said concept has now been specifically provided.

The autonomy of the central bank has a different perspective in developed countries like the United Kingdom, United States of America and Japan. In our view there is no need to prescribe this section as for economies like Pakistan there cannot be any presumption of lack of coordination between two vital arms of the government. The ultimate responsibility on economic affairs lies with the Ministry of Finance. This provision is required to be seen within the perspective of the non-voting status of the Secretary Finance in the Board.

In practical terms it is highly important to see that there is no possibility of having a divergent view between the central bank and the Ministry of Finance.

Syed Shabbar Zaidi & Co.

Copyright Business Recorder, 2021