SBP (Amendment) Bill 2010

Although the unanimous approval of the State Bank of Pakistan (Amendment) Bill, 2010 by the National Assembly's Standing Committee on Finance on 3rd August was not a mean event, yet it has failed to draw the desired attention in the media due probably to higher focus on the violence in Karachi, devastating floods across the country and extensive censuring of the President on his foreign visits.
Its importance flows from the fact that enactment of the law based on the amendments approved by the NA committee under the chairmanship of Fauzia Wahab could prove to be a milestone in the central banking history of the country and drastically reduce the scope of the Finance Ministry to borrow from the SBP. As for monetary policy formulation, the role and responsibilities of the Central Board of Directors of SBP, after the passage of the Bill, would largely be shifted to the proposed monetary policy committee (MPC), comprising Governor, Deputy Governor and the relevant head of the SBP department plus two outsiders to be nominated by the government. The present Fiscal and Monetary Co-ordination Committee headed by the Minister of Finance was also proposed to be replaced by the new MPC.
Besides, it was clearly stated that the two outsiders on the committee will not be the officials of Finance Ministry. Giving reasons for such a bold departure from the past practice, the NA Standing Committee observed that since all the powers for monetary policy formulation rested with the SBP Governor at present, it was easier for the Finance Ministry to influence the head of the central bank. Another major decision was the imposition of restriction on government's borrowing from the central bank to only 10 percent of revenue collection of the last financial year as well as the binding to retire the debt stock of Rs 1,200 billion with the deadline of the next five years.
Though powers of the federal government were proposed to be curtailed in a massive manner under the Bill, but Special Secretary Finance, Asif Bajwa, who represented the government at the meeting did not oppose any clause of the SBP (Amendment) Bill, 2010.
The provisions of SBP Bill, 2010, proposing changes in the SBP regulations and comments made by the members of the NA Standing Committee on Finance in the meeting, clearly reflect the present mood of this august body, particularly its urge to make qualitative changes in the area of monetary policy formulation and defang the Ministry of Finance with a view to disassociate it entirely from this process. Another major objective sought to be achieved through the Amendment is the enforcement of a strict financial discipline by the government by putting a bar on its borrowings from the State Bank.
Apparently, all of this is in good faith and in the larger interest of the country. As it is, the Standing Committee on Finance does not seem to be satisfied with either the present conduct of monetary policy or with the fiscal management of the country. The induction of two outsiders in the monetary policy committee and shift the balance of power to this committee from the Central Board of Directors of the SBP is probably meant to inject more professionalism in the monetary policy formulation by enlisting monetary economists of high calibre from universities or other economic research institutions. However, how the new arrangement is actually put in place is uncertain as yet. If the main function of the proposed monetary policy committee is to give an input and assist the present Central Board of Directors in designing monetary policy of the country, the new arrangement could be considered as an improvement but if the committee itself is fully charged with this responsibility, then the Central Board of the State Bank would become, more or less, redundant. Low priority functions of a central bank like regulation and supervision of banks and internal management could even be looked after by competent administrators in the respective fields.
In our view, it would have been better if the members of the Central Board of Directors of the central bank were themselves professionally equipped to know the intricacies of monetary policy so that outside help was not needed. Such an initiative could have been taken at the time of nomination of the Board members by the government. The present system of having representation from agriculture, trade and industry with provincial distribution has not given desired result. Secretary Finance as nominating authority is usually not in favour of monetary tightening making his fiscal task more onerous. It is then left to the governor to do the needed but unpleasant rate hike. This implies that the autonomy of SBP depends on the independence of the governor as a person.
Imposing a restriction on the government's borrowing from the central bank to only 10 percent of revenue collection and binding the fiscal authorities to retire the debt stock of Rs 1,200 billion within the next five years looks quite intriguing. This is an indirect way of telling the government to put its house in order by mobilising more resources and cutting its expenditures. Such a condition would also reduce inflationary pressures in the economy because excessive government borrowings from the central bank leads directly to excessive liquidity in the economy and causes high inflation whereas other sources of deficit financing are less hazardous.
However, it needs to be pointed out that excessive borrowings from the SBP are a symptom and not the source of actual disease. Their level would automatically decline once the government learns to live within the available resources. Overall, we feel that the intention of the Standing Committee was very noble but how their designs are translated into reality would be the real test of the policy makers. Public representatives are not supposed to be the real practitioners of the art but could only give the broad guidelines and principles to achieve the desired goals.