The Cabinet, which is scheduled to meet on Tuesday, will clear the State Bank of Pakistan (SBP) Amendment Bill 2010, enhancing effectiveness of the central bank in monetary policy formulation, according to official documents obtained from Finance Ministry. These amendments are part of the agreement between the GoP and the International Monetary Fund (IMF).
The documents show that supervision of financial sector has gained more significance in view of its magnification and impact on the economy of the country. The foreign exchange regime has already been liberalised to a large extent. The developments in the market along with liberalisation of banking sector have created new challenges for the central bank in its role as regulator of the banking sector for which amendments in Banking Companies Ordinance, 1962 have already been submitted to Parliament.
Monetary Policy is an important mechanism to regulate the economy of any country. The SBP is entrusted with formulation and implementation of the Monetary Policy. In order to enhance the effectiveness of the SBP in Monetary Policy formulation and implementation the following changes are being proposed to be incorporated in SBP Act, 1956 to bring it closer to the current emerging functions of a modern central bank and to better conform to best international practices:
(i) Monetary and fiscal policies co-ordination board is proposed to be replaced by the monetary policy committee with statutory status, with external experts to be appointed by the federal government. The committee will be responsible to formulate, decide and implement the monetary policy and decide on matters such as those relating to key interest rates, supply of reserves, exchange rate policy, and the limits and nature of advances and loans to the government;
(ii) (ii) lending to the government has been restricted by insertion of a new section (Section No 20A);
(iii) (iii) emergent functions pertaining to open market and credit operations and international reserves have been elaborated and clarified by substitution of the existing sections and;
(iv) (iv) section 52 of the SBP Act which provided for the supersession of the central board by the federal government since the time the State Bank was privately owned, has been proposed to be repealed in conformity with the current autonomy of the Central Bank, and international practices.
The documents further show that SBP Act, 1956 is protected at entry No 25 of the Sixth Schedule to the constitution of Islamic Republic of Pakistan, 1973. Therefore, under article 268(2) of the constitution prior sanction of the President, through Prime Minister, has been obtained for amendments in the SBP Act. The submission of the SBP (Amendment) Act, 2010 to the Parliament by end of December, 2009 remained an outstanding IMF prior action.
In view of paucity of time, the Prime Minister was pleased to allow the submission of the proposed State Bank of Pakistan (Amendment) Bill, 2010 directly to the Parliament in terms of Rule 16(2) of Rules of Business, 1973 by relaxing the requirements of Rule 16(1)(a) read with Rule 27(4) & (5) of Rules of Business, 1973. The Cabinet is expected to accord ex post facto approval to the proposed State Bank of Pakistan (Amendment) Bill, 2010.