The quantum of State Bank's autonomy, like central banks of the other countries, has generally been a matter of contention in Pakistan. The State Bank of Pakistan (Amendment) Act, 1997 was a very bold attempt to grant a great measure of autonomy to the SBP but the subsequent developments were less than comforting in many respects.
Realising the need to improve upon the Amended Act of 1997, the IMF in its presently suspended Stand-By Arrangement (SBA) with Pakistan had prescribed certain further amendments to increase the independence of the SBP which after passing through a number of stages have now been cleared by the Senate. Compared with the existing Act as amended in 1997, the proposed amendments indicate that the changes approved earlier by the Parliament on the subject have largely been ignored and the Senate has now come up with a version that would alter the complexion of the Central Board of the State Bank entirely, restrict the freedom of the government to borrow from the State Bank to a large extent, and broaden the authority of the State Bank to undertake some of the functions assigned to it. Since the subject is of vital interest and the proposed changes, if enacted into law, could change the nature of relationship between the government and the State Bank profoundly.
A fundamental change has been proposed in the composition of Central Board of Directors, which is the highest authority of the State Bank and looks after the general superintendence and direction of the affairs and business of the Bank. At present, the Central Board consists of the Governor, Secretary Finance, and seven Directors, including one Director from each province to be nominated by the Federal Government ensuring representation to agriculture, banking and industrial sectors. Under the proposed arrangement, while Secretary Finance has been excluded from the Board, four of the members to be appointed will be eminent professionals from the fields of economics, finance, banking and accountancy. Provincial quota, would, however, continue to be observed. An interesting provision of the new Act will be that those appointed on the Board will have no conflict of interest with the business of the Bank. The most significant change of excluding Secretary Finance from the Central Board indicates, in no uncertain terms, the desire of the Senators to completely separate the domains of the Ministry of Finance and the central bank of the country and, thereby, give the State Bank full authority on monetary policy formulation, etc.
It would be useful to recall in this context that Secretary Finance has always been found to be a highly influential member of the Board who would effectively dominate the discussions and even prevail upon the Central Bank governor if the latter is relatively weak in stature. With the Governor now in full command assisted by eminent professionals in the related fields to be nominated as Directors, the quality of debate in the Board meetings could improve considerably and monetary policy formulation of the country could be better than before. Also, there would be no role of the government in the design of monetary policy. However, the level of improvement would depend on the competence of the members of the Board and their devotion to the task at hand. Hopefully, the government would be taking utmost care while nominating the Board members. It is also expected to ensure only top quality selection, without any regard to their political leanings. We, however, don't understand the logic behind exclusion of the representatives of agriculture and industrial sectors from the Board. It is quite possible that the Senate is more interested to run the country's central bank in a purely professional manner and exclude sectoral influences from its management.
Monetary and Fiscal Policies Co-ordination Board is proposed to be expanded by the inclusion of "two eminent macro or monetary economists with proven record of research and teaching to be appointed by the Federal Government". The present Board consists of Minister of Finance as Chairman, and Minister of Commerce, Deputy Chairman, Planning Commission, Governor, State Bank and Secretary Finance as members. The Board is required to co-ordinate fiscal, monetary, foreign trade and exchange rate policies and ensure consistency amongst various macro-targets. Other functions of the MFPCB are also quite complex and it has not been able to hold regular meetings due to a variety of reasons. We don't know how the inclusion of the two outside experts could lead to bring about a marked improvement in the level of debate and quality of functioning of the Co-ordination Board when at least three existing members of the Board - Deputy Chairman, Planning Commission, Governor State Bank and Secretary Finance - are supposed to be professionals and they don't really need expert advice from others. If at all required, they could always go back to their institutions and have the necessary input. More members on the Board, on the other hand, could sometime mean more delay in holding regular meetings.
In order to strengthen the provisions already contained in Section 9A of the existing SBP Act with regard to the determination and enforcement of credit limits to be extended to the Federal Government, provincial governments and their agencies, Section 9C has been proposed to be added to empower the Central Board to determine ways and means limits for the Federal Government which have to be repaid within ninety-three days from the end of the financial year to which it relates. Any borrowings in excess of ways and means limit have also to be repaid by the end of each quarter. Besides, if any of the borrowings is not repaid within the specified period, the Finance Minister would be obliged to place before the Parliament a statement giving a detailed justification for this failure. Although, the breach of this clause is not required to be approved by the Parliament, yet the restrictions sought to be imposed on government borrowings through section 9C are so severe that these new provisions read with the power already enjoyed by the SBP under Section 9A would give the State Bank almost absolute authority to accept or reject government's request to borrow from the State Bank. After reading the provisions of Section 9A and 9C, one could easily come to the conclusion that the powers enjoyed by the State Bank, after the proposed amendments are enacted, would almost be unrestrained in deciding the level of government borrowings and the government would be required to make a profoundly convincing case if it wanted to borrow from the SBP.
Section 18 on the "Power of Direct Discount" has been proposed to be substituted by adding various types of open market and credit operations which are more in conformity with the new trends and the situation now prevailing on the money market. It is also quite clear that the State Bank would now be authorised to issue certificates of deposits and new instruments including those that are Shariah compliant to regulate the monetary and credit system. A long-standing demand of the Islamic banks to absorb their surplus liquidity has obviously been met by the inclusion of this clause. Section 23 on "obligation to buy and sell foreign exchange" is also proposed to be substituted to take care of the new developments, but the role of the government has been omitted under the proposed amendment.
Under the existing SBP Act, the State Bank was obliged to buy or sell foreign exchange at rates and conditions as determined by the government but there is no mention of the role of the government in the new provisions. Also, the State Bank would be authorised to "appoint managers, custodians, consultants, and any other professional advisors for the effective management of foreign exchange reserves of the country". It seems that the Senate wants to give full responsibility to the State Bank to manage foreign exchange business of the country. However, how the new arrangement would ultimately work or play out and be an improvement over the existing one, only time would tell. Section 36 on cash reserves of rescheduled banks has been proposed to be amended by requiring the banks to hold minimum reserves on deposit accounts with the State Bank in pursuance of its monetary policy objectives.
Further, the State Bank has also been authorised to pay remuneration or return on such special reserves. This new clause is definitely an improvement as under the existing Act, there was no provision to pay a return to the banks on their excess reserves and the maintenance of cash reserves as a monetary policy instrument was not specified strictly. The new provision would give an added incentive to the banks to place their excess liquidity at the disposal of State Bank which could now easily prescribe a higher level of cash reserve requirement to achieve its monetary policy objectives without much grumbling by the banks.
A highly significant addition has been proposed in Section 46 which relates to the duties and responsibilities of the management and the staff of the State Bank. The new clause to be inserted under this section says that "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. The autonomy of the State Bank shall be respected at all times and no person or entity shall seek to influence the members of the Central Board or the staff of the Bank in the performance of their functions or interfere in the activities of the Bank". The inclusion of this provision would effectively block any outside interference in the policies and working of the State Bank. The forceful language used in this context clearly and unambiguously reflects the intensity of desire of the Senate to see a completely autonomous central bank whose Board and staff would not be dictated under any circumstances by any external forces or influences. Towards the end, Section 47 has been amended to insert "gratuity and provident fund" after the word "pension" but this amendment has only been made to take care of the new terms and conditions of employment in the State Bank and does not materially affect the role of the State Bank as a policy-making institution.
It is more than evident that the amendments as proposed by the Senate could make the State Bank as one of the most powerful central banks of the world. However, more authority and more power would also mean greater responsibility to perform the functions assigned to it. Public at large would judge its new role mainly on the criteria of maintaining price stability in the country. However, there are few factors which need to put into proper perspective in this respect. In order to exercise independent authority free from any outside interference or pressure, members of the Central Board of the State Bank including the Governor have to be competent, confident, assertive and, above all, willing to lay their jobs on the line to realise the objectives of an independent monetary policy strategy.
In the last few years, for instance, the Federal Government has been found to be borrowing heavily from the banking system to finance the fiscal deficit not because of any loopholes in the State Bank Act but mainly due to the fact that the SBP administration succumbed to Islamabad pressure on every occasion. Also, while judging the role of the State Bank, it would not be proper to ignore its policy constraints. For example, a central bank alone cannot ensure price stability if all other factors like domestic growth, international prices continue to exercise contrary influences. Similarly, it has been proved in the economies of certain developed countries in the recent past that banking companies could go bankrupt even if the banking supervision by the central bank is proper and sound. Finally, clearance of the proposed amendments by the Senate is only a step forward in a seemingly right course. These changes are, perhaps, still subject to vetting by the IMF before these are debated and passed by the National Assembly. Therefore, neither the proposed amendments nor our views in this respect may be treated as conclusive and final.