The way the State Bank of Pakistan (Amendment) Bill, 2022 (“Bill,” when enacted: “Act”) was railroaded through the Assembly and the Senate to appease the International Monetary Fund (IMF), with the open complicity of the opposition, is a national embarrassment. It exposed the reality of both the farce at the foothills of Margalla which rejoices in the name of ‘parliamentary democracy’ and the noora kushti we call ‘politics’ in Pakistan.
When assented by the President, the Act itself may be the last nail in the coffin of a free, sovereign, democratic Pakistan. It would spell untold misery for the people of Pakistan and wouldn’t spare the clueless rulers who are abandoning ship in droves. This article takes a closer look at what might lie ahead.
A name is no clue to what it names. When it acquired control of Bengal in 1757, the East India Company did not change its name: United Company of Merchants of England Trading to the East Indies. But in reality, from a Company of Merchants it had become a government in Bengal.
Just so, the vital, most important fact to grasp is that although still called the State Bank of Pakistan (SBP) by the Bill, the new SBP (“NSBP”) to be created by the Act will no longer be a public agency. It will be a privatised, but not fully autonomous non-government organisation, an NGO, albeit of a special kind: a Quasi-Autonomous NGO, or QUANGO, as it was called in the 1970s.
Without getting bogged down in details—although important reservations can be expressed about numerous, scandalous clauses of the Bill—the consequent management arrangements suffer from three major faults. First, in the name of operational freedom (‘autonomy’), NSBP will be given freedom from all institutional constraints (‘independence’); with virtually no ‘accountability’ (institutional or personal), and insufficient requirements for ‘transparency’.
Second, this will gravely impair the efficacy of public policy by creating “a fragmented, ‘siloized’, central government system, lacking a sense of wholeness and strategic integrity” (as the New Zealand State Services Commission found in 2001, after pioneering public management reforms of the same ilk). Third, it will undermine the basis of constitutional government, rule of law, and democracy in Pakistan, by its naïve theory-inspired provisions.
Turning to financial impact, NSBP will be funded entirely by public money. In fact, together with the gift of independence, the Act will grant NSBP a completely unnecessary, immediate increase in paid-up capital from Rs.100 million to Rs.100,000 million (an increase of over $550 million).
Most, if not all the increase must be paid “in cash” by government from public funds. So, the net proceeds of the $1 billion to be received in additional debt to the IMF would be around $450 million. This too will be recycled in interest payments to our creditors, with zero if not negative impact on the government’s deteriorating fiscal position.
The cutting edge of the Bill, however, its raison d’être, is its prohibition on government borrowing. All governments borrow to cover maturing debt service payments plus some new borrowing to finance additional spending. Presently, there is a “limit” on government borrowing from SBP which has to be zero at the end of each quarter.
The Act would turn this into a “prohibition” at all times. To assess its impact, we need to understand how government borrows and how a Creditors’ Cartel-Without-Borders now holds the people of Pakistan in bondage, through their government.
Presently, government announces its borrowing requirements for each auction. Banks bid and government rejects bids above a cut-off interest rate, which it decides. If all bids are rejected, government borrows from SBP to meet its requirements.
The availability of this SBP option keeps the bids realistic. With the start of the IMF programme in July 2019, however, the government has not borrowed from SBP, by agreement. Not surprisingly, the banks — a close cartel, with the six biggest banks (two foreign-owned) accounting for 80 percent of assets of all banks — jacked up interest rates and are making massive windfall profits.
The business is so lucrative that by now over 60 percent of total bank loans go to government rather than the private sector, suppressing investment and growth. To compound matters, banks borrow the money they lend government, from SBP (through open market operations), pocketing the margin. The permanent prohibition of borrowing will deliver the sheep to the wolves.
The Creditors’ Cartel consists of domestic and foreign recipients of interest income. It is led by the small class of super-rich domestic recipients, who constitute and control governments in Pakistan. (They also derive income from rents, monopoly profits, and grand corruption, and are the largest holders of Pakistan Investment Bonds.) Through government, they extract revenues from common citizens who earn modest wages and salaries and moderate competitive profits, while themselves evading taxes and investing abroad.
This domestic class, led by bankers, works closely with foreign recipients of interest income: foreign governments, banks (including bank clients) and now also expatriates, especially large holders of Naya Pakistan Certificates. The IMF looks out for their interests.
They receive less than 10 percent of interest paid by government but wield indirect, non-economic power. It is ironic that while civilians and soldiers battled for supremacy, this Creditors’ Cartel succeeded in placing them, the government, and the people, in debt bondage. Occupying and gate-keeping all decision-making forums, this Cartel blocks all solutions in the national interest.
The IMF has been ‘bailing out’ Pakistan, lending money to government so it doesn’t default on foreign interest. But domestic banks and bondholders have raised false alarms about a potential default on domestic interest payments, to enlist the IMF to coerce government into taking several anti-people, pro-banks actions.
The alarms are false because a rupee default is impossible as long as government can print money. (No, it doesn’t always cause inflation.) All central banks are both government’s bank and bankers’ bank. Enlisting IMF support, domestic banks and bondholders have ensured that in Pakistan, the central bank would become solely a bankers’ bank. In this way, like the IMF looks out for foreign cartel members, NSBP would take care of domestic cartel members.
It is in this background that we can understand the impact of the borrowing prohibition. Besides foreign borrowing, the government has only three sources of financing: revenues from the people, borrowing from (and through) banks, and printing money through the central bank.
By cutting off the government from the last source, the Act will shift the burden of debt servicing squarely to the people, since the NSBP would protect the banks’ profit margins. This will endanger public finances, render the next budget impossible to make, and by protecting and enriching domestic banks and bondholders, create social unrest by pitting the government against the people.
Nor does it bode well for a democratic, sovereign Pakistan. In 1948, Quaid-e-Azam Muhammad Ali Jinnah had inaugurated the State Bank of Pakistan with the words: “The opening of the State Bank of Pakistan symbolises the sovereignty of our State in the financial sphere, and I am very glad to be here today to perform the opening ceremony.” Unfortunately, however, the parliament seems to have stained the Quaid’s memory, smashed his symbol of financial sovereignty, and cleared the way for non-democratic influence through the passage of the SBP Bill.
(The writer has served as Senior Economist with the World Bank and as Chief Economist of the Government of Pakistan)
Copyright Business Recorder, 2022