There is quite a stir in the media and policy circles on the proposed amendments in the SBP law. Journalists and economists jumped on the bandwagon and speculated on widely circulated snippets of what was reportedly an old draft. Others have expressed resentment over the hush-hush nature of the process as rumor mills suggest that the amendments may be enacted through a presidential ordinance as a prior condition of the IMF board approval. Others are too critical on the supposed enhanced autonomy of the State Bank. Many sane voices have also questioned the downgrading of growth objective of the central bank.
Based on channel checks, and off the record discussions with stakeholders, this article presents SBP's perspective, keeping in mind established international best practices. But first, some context setting is imperative to understand the process followed thus far.
SBP's internal team has been working on the amendments since 2015. The team has gone through legislation of 95 central banks' and released a draft based on local context and international best practices. At the start of 2020, SBP sent first draft to the IMF for comments. After incorporating (not all) changes proposed by the IMF, the draft was sent to the Ministry of Finance (MoF) in April 2020. Back and forth consultations continued and finally a draft was approved by the federal cabinet this month. In between, over a dozen drafts were prepared, while snippets from only one of them (possibly redundant) draft are circulating on the social media.
IMF's condition was for the draft to be submitted in parliament. That will happen once the National Assembly is in session again. Then, the process of parliamentary debate will take place before the law is amended. This implies the process was not carried out in haste and is far from concluded. The problem is in the strategic communication by MoF. The draft bill is still not made public which led to a mad rush of speculation in the print and electronic media. Finally, the ministry posted a deck of slides on the proposed amendments on its website earlier during the week. This writer strongly urges the ministry to release the full draft version for a wider debate.
The amendments sought intend to make SBP more autonomous and to provide it with a clear mandate, a welcome move. In the past, SBP had often remained under the thumb of MoF. Politically-motivated monetary and exchange rate policies were adopted to create a perception of better economic picture before successive general elections. The 2008 and 2018 crises are manifestation of undue political interferences by the outgoing governments at the time. By taking the central bank out of the control of finance ministry, a similar crisis can hopefully be avoided in the future. If that is to happen, there is a fair chance for Pakistan to come out of the rut of frequent boom and bust cycles.
The most far-reaching amendment, then of course, relates to the redefining of SBP's mandate. Existing objectives are vague and widely interpreted to mean that price stability and growth are dual and equally important objectives for the central bank. It is now being proposed that domestic price stability be made the primary objective, with secondary objective of stability of financial system. Tertiary objective is to support government policies that foster economic development. Many commentators are of the view that growth should remain a joint primary objective.
Over the past few decades, Pakistan's long-term growth has been on a secular decline. In between, there were periods of high inflation. This means that the twin focused objectives as defined currently are not working out. It may be high time to try out things differently and adopt ways that have been successful elsewhere across the world. Global literature as well as Pakistan's own history suggests that high growth is hard to achieve in a high inflationary environment. Moreover, inflation is a broad form of tax which hits the poor the worst. In that sense, it may be argued that price stability is a far more important objective to achieve economic well-being of a nation as a whole. And if that policy does not work, the parliament reserves the right to revise the Act again in future and make growth top priority again for the SBP.
Then there was confusion over the continuation of SBP's refinance facilities. In the proposed amendment (slides deck), SBP refinancing schemes to support access to credit in underserved sectors is still permissible. In fact, the spectrum of refinancing facilities will expand if the amendments are enacted. Many central banks, after 2008 global financial crises, now rely on quantitative easing. It is hoped that the bank's scope in that respect shall be enhanced. However, quasi-fiscal operations shall be discontinued. Interestingly, currently SBP is not operating any quasi-fiscal schemes.
In the past, many existing refinance schemes operating since the 1970s were misused. Influential business groups lobby politicians to not let these go. Now, the SBP will have a better grip on these schemes and will be able to decouple the political economy from the equation. Such schemes are not supposed to be under central bank's ambit anyway. A better mechanism is to have effective development finance institutions (DFIs) - just as was the case in Pakistan during the 1960s. The government should work to develop DFIs and expedite operationalization of EXIM Bank. Once these are in place, the SBP may slowly taper off its refinancing facilities over time.
Still others fear compromise of national economic sovereignty due to end of direct government borrowing. It is pertinent to note that in the existing Act (after last amendment in 2015), the government borrowing from SBP is net zero on quarterly basis. Hence, the new change will have limited impact.
In principle, the government borrowing from central bank is inflationary in nature and eliminating it from legal framework will ensure that finance ministry is forced to exercise self-discipline in its budget-making and resource allocations. However, there should be some room for direct government borrowing in the event of natural calamities or emergencies. For instance, the Bank of England provided direct lending to the government in response to Covid-19. Nonetheless, indirect borrowing (through reverse open market operations) by government from SBP via commercial banks will continue. This is a better (though more expensive) mechanism where the risk is being transferred from central bank to commercial banking system, and the latter charges incremental spread for assuming that risk.
The other criticism is on enhanced autonomy for SBP. What is wrong with the autonomy when it comes with better accountability? Achieving autonomy is key to taking the SBP out of finance ministry's control. In the past, there were incidents when the Governor had to obtain permission from Finance Minister for foreign travel and other petty issues. Then, the Governor used to play second fiddle in the Monetary and Fiscal Coordination Board. The ministry is the biggest buyer of banking system credit, while monetary policy and financial stability fall under the exclusive domain of the SBP. There is a clear conflict of interest if a Finance Minister drives the agenda on either of those accounts.
In the past, Finance Ministers had clear influence over policy rate and exchange rate, leading to politically-motivated decision-making. SBP's foreign exchange reserves were wasted to keep currency at the desired level. Currency printing, low interest rate, and an overvalued exchange rate contributed to numerous external account crises. Pakistan had to go to the IMF and forced to take tough actions. Each time, a new government came to power during the last two decades - first in 2008 and then in 2018, interest rates had to be raised to double digits along with massive currency devaluation. Such volatility in the price of money stems the flow of economic growth. Now the SBP can smoothen these adjustments to not let any bigger crisis to emerge.
Another item which has caused a lot of uproar in mainstream media is that SBP Governor and other key officials of the central bank shall not be investigated by NAB, FIA or other authorities without prior consent of the board. Ironically, those critical of this proposal were until recently insisting that bureaucracy is not taking decisions due to fear of NAB and others. Maybe these folks should appreciate that finally, at least the SBP shall work freely without any fear of undue victimization.
However, this does not imply that the SBP shall face no accountability over its decision-making. It cannot be allowed to become a state within a state. Going forward, the accountability mechanism is well-defined, with checks and balances. The Governor is appointed by the President, and this is not proposed to change. In case of the Deputy Governor, the federal government will appoint one (out of a panel of three recommended by the Governor), following consultations with the Finance Minister. There will be three Deputy Governors.
These four officials (Governor and his or her three deputies) will be the most important and powerful people in the SBP. All the key appointments are in hands of the government. Finance Minister will have a say in the shortlisting of Deputy Governors.
In case of non-executive directors on the SBP board, these will also be appointed by the President on the recommendation of the government (and not of the Governor or of the SBP board). However, finance secretary will no longer be a member of the board. For external members of the Monetary Policy Committee (MPC), the federal government will make appointments on the recommendation of the board -this is same as in the existing law.
The terms of Governor, his deputies, board and MPC members will be of five years, with an option for a second term renewal. In most of these cases, the existing term is of three years. That is again in line with best international practices and to insulate these appointments from the election cycle to mitigate the risk of politically driven appointments.
Another important aspect missed by many commentators is the role of the Executive Committee. The committee will comprise the Governor, Deputy Governors, executive directors, and other officials. Here, the voting power will be with the Governor and the Deputy Governors, with each official having one, equally weighted vote. The committee will make decisions regarding bank's core functions and other matters. In this committee, the powers of the Governor will be the same as his deputies. The deputies are appointed by the federal government and based on the names proposed after consultation with the finance ministry.
All of this suggests that the Governor will not have absolute power. The office of Governor is accountable to the parliament in the same way as prevalent in many economies. It is unfortunate how many reputed economists are actively imagining "a state within a state" or pushing for conspiracy theories. The proposed amendments are in an Act of Parliament, which can be changed again through a simple majority. The existing system has clearly not yielded desired results. There may be little harm in doing things differently. Moreover, the de jure autonomy may take years before becoming de facto. Even then, if the new system leaves us worse off than before, subsequent legislatures can reverse those changes.
The confusion and public concerns over the proposed bill may persist even after its passage from the parliament. The best way of addressing these concerns is to further enhance parliamentary oversight of central bank's operations. That may not be a big trade-off for an independent and autonomous SBP, free from influence of the executive branch.
(The writer is the head of BR Research. The views expressed in this article are not necessarily those of the newspaper)
Copyright Business Recorder, 2021