President Asif Ali Zardari has finally given his assent to the State Bank of Pakistan (Amendment) Bill, 2012 to strengthen the power of the Central Board of Directors of the SBP to formulate and implement monetary policy and control borrowings by the government. According to spokesman for the President, under the Amendment Bill, the SBP may require banks or financial institutions to hold minimum reserves on deposit accounts with banks in pursuance of its monetary policy objectives. Powers of the federal government to supersede the Central Board have also been withdrawn. The SBP autonomy shall be respected at all times and no person or entity shall seek to influence the members of the Central Board and Monetary Policy Committee or the staff of the Bank in the performance of their functions or interfere in the activities of the Bank. A new sub-section in the Bill says, "the Bank, the members of the Central Board or the staff of the Bank shall not take instructions from any other person or entity, including government or quasi-government entities." Besides, the SBP has been empowered to purchase, hold and sell currencies and instruments, including indices and derivatives, issued by the government, agencies, local authorities, corporate and supranational in countries whose currencies have been declared as approved foreign exchange. To bring about more effective coordination between fiscal and monetary policies the existing Fiscal and Monetary Board has been strengthened by adding two monetary economists. For the purpose of regulating the monetary and credit system, the bank may issue certificates of deposit and new instruments, including those that are Shariah-compliant. Under the Amendment, government borrowing shall be brought to zero at the end of each quarter barring the ways and means limit that would be determined by the Central Board from time to time. However, the debt of the Federal Government owed to the Bank as on April 30, 2011 shall be retired not later than eight years from that date. If any of the provisions about government borrowings were not observed by the Federal Government, the Finance Minister shall place before the Parliament a statement giving a detailed justification for the said failure. But amid the euphoria, a dose of healthy skepticism is required. Earlier, the SBP had proposed the creation of a Monetary Policy Committee (MPC), independent of the central board, where the Governor and his team of four other experts from within the SBP would present their views on monetary policy formulations to two outside eminent economists and two nominees of the Central Board. This proposal has been deleted. The MPC has been done away with and instead the Fiscal and Monetary Board enlarged. The powers of the Central Board of Directors to have exclusive control of the SBP's balance sheet remains intact. There is no single model for an autonomous central bank. However, there is a convergence on the need for financial and administrative autonomy and independent monetary policy formulation free from influence by the political forces in power. There is, however, resistance from political quarters as well as the fiscal authorities from granting too much power to the central bank. This is so despite the fact that every incumbent government, whether civilian or military, has the power to appoint the Governor, as well as the Deputy Governors of the SBP on a three-year term. After the latest amendments to its Act, the State Bank could be regarded as an autonomous central bank in terms of internal administrative arrangement, monetary policy formulation and the choice of necessary instruments to follow a particular strategy. A central bank vested with all these powers and almost a guarantee of non-interference in its affairs by outside entities is definitely a very laudable step by the government to keep its hands off from the functioning of an important organ of the state and let the State Bank determine the direction of monetary policy independently. However, it needs to be mentioned that the motivating force behind the case for granting autonomy to the State Bank has usually been the IMF and not some internal force like the Parliament. Both the State Bank of Pakistan (Amendment) Act, 1997 and the present Amendment are the result of a policy strategy pushed by the IMF while entering into an arrangement with the country and then passed by the National Assembly to institutionalise the understanding. This by no means tends to dilute the provisions of the SBP Act but explains to a certain extent the attitude of the government not to abide by the law in letter and in spirit and a lack of resolve on the part of the central bank to act boldly and forcefully or put itself forward in an insistent manner with a view to safeguarding its autonomy. The Amendment Act, 1997 and subsequent developments are an ample testimony to such a frame of mind. Under the amended Act, the Central Board of the Bank was to "determine and enforce, in addition to the overall expansion of liquidity, the limit of credit to be extended by the bank to the Federal Government, provincial governments and other agencies of the Federal and provincial governments". Everybody knew the fate of this provision. Not only was the law very strict, it was violated with impunity. The SBP continued to make all the right noises through its various documents and monetary policy statements but never mustered courage to stop the government from borrowing excessively from the banking system by invoking the relevant provisions of the Act. Some of the Governors left the scene quietly and surreptitiously owing to a variety of reasons while others preferred to use their competence and persuasive skills - with little or so success - to impress upon the fiscal authorities to follow prudent policies. Several lessons could be learnt from the experience of the SBP Amendment Act, 1997 and expectations from the Amendment Bill, 2012 may be adjusted accordingly. It is very obvious that in our environment it is nearly impossible for a Governor or a member of the Central Board to decline Islamabad's requests for financial accommodation because they don't always look to the SBP Act as a fount of power. However, at times, it can provide some leverage to a Governor to have his way if he has a proper rapport with the Prime Minister and the Finance Minister of the country. Also, the Amendment Bill, 2012 seems to have certain loopholes which need to be noted. For instance, it is now provided that government borrowings shall be brought to zero at the end of each quarter, barring the ways and means limit to be determined by the Central Board. Therein lies the rub. Islamabad could influence the SBP administration to raise the ways and means limit in order to increase its borrowing limit, which would mean no violation of the Act. Another way could be to borrow from the commercial banks and force the SBP to inject liquidity into the banking system. This is exactly the same mode of borrowing which is being adopted now. Moreover, the Finance Minister is required to place a statement including the reasons for excess borrowings before the Parliament and not seek its approval, which would mean some paperwork but no analysis or discussion on the subject in the National Assembly. In our view, the SBP Amendment Act, 1997 was a very major effort towards granting greater autonomy to Pakistan's Central Bank and the present Amendment seems to have fallen short to generate the necessary momentum to finish an unfinished agenda. Perhaps the composition of the Central Board of Directors needs to be looked at afresh. Representation of the Ministry of Finance, Industry and Agriculture on the Central Board may constitute a 'conflict-of-interest' of major borrowers on monetary policy formulation. The past practice of packing the board with retired bureaucrats, having little or no experience in monetary policy making process, was equally wrong. In addition, the Standing Committees on Finance, in both the Senate and the National Assembly, need to be strengthened; with induction of staff capable of providing expert analysis to legislators to keep a tight vigil on economic developments, SBP's quarterly reports and expenditure variance from the approved budget of the Federal Government. Such initiatives could make it difficult for the government to violate the Fiscal Debt Limitation Act and provide teeth to the autonomy of the SBP in monetary policy formulation. In the meantime, however, the SBP is required to pursue its objectives diligently and efficiently with a view to defeating the designs of certain forces that might seek to complicate, stall and derail any meaningful reform. It is expected to place greater reliance on structural changes and on rules rather than discretion, recognising the full import of idiom 'power tends to corrupt and absolute power corrupts absolutely'. Copyright Business Recorder, 2012
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