Karachi January 9 2022: The amendments being proposed for the SBP amendment act are in line with international best practices and also take into account the ground realities in Pakistan. By facilitating domestic economic and financial stability, the amendments will help support sustainable growth and avoid repeated booms and busts that have characterized Pakistan’s past and led to painful consequences in terms of higher inflation, higher poverty, and lower growth.
Overall, the amendments balance the provision of necessary operational and financial autonomy to the State Bank with new mechanisms for enhancing transparency and strengthening accountability.
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More specifically, the amendments have six key purposes: to clearly define the objectives of the SBP to improve its accountability; to outline the SBP’s functions in line with these objectives; to provide the SBP necessary financial resources to help achieve its objectives; to strengthen the functional and administrative autonomy of the SBP; to increase transparency in the operations of the SBP and strengthen its governance; and to enhance the SBP’s accountability by strengthening oversight functions and increasing reporting requirements. The rest of this document discusses these in turn.
First, the amendments identify domestic price stability as the primary objective of the SBP, followed by financial stability and support of the general economic policies of the Government.
The clear specification of objectives in this manner will make the SBP more accountable for achieving them. In addition, it would help the State Bank to prioritize its policy actions appropriately to ensure sustainable economic growth in Pakistan. There is strong international evidence that countries with an independent, accountable and transparent central bank have lower and more stable inflation over long periods of time, which in turn lays the foundation for sustainable growth.
Conversely, international experience has repeatedly shown that countries that prioritize growth at the expense of price and financial stability are not able to sustain growth and have repeated boom-bust cycles—rapid economic growth followed by a financial crisis.
Second, in order to achieve these objectives, the amendments suitably align the SBP’s functions and collate them under a new section.
Given the inflationary nature of government borrowing from the Central Bank, the amendments propose to exclude provisions related to Government borrowing5 as well as the quasi-fiscal operations of the State Bank.
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The State Bank would, however, continue to extend refinance facilities to financial institutions with appropriate checks and balances.
Further, the lender of last resort function of the central bank has been further strengthened to enable it to provide temporary
liquidity facility to banks against appropriate collateral.
Third, the amendments seek to provide the SBP with sufficient financial resources to achieve its objectives. A central bank’s autonomy can be jeopardized if it cannot continually avail itself of sufficient financial resources to fulfill its mandate. The amendments allow SBP to be sufficiently capitalized and prescribe the necessary mechanism to achieve the desired level of capital over time, through both statutory reserves as well as retained earnings.
Fourth, the amendments strengthen the functional and administrative autonomy of the SBP. A key element of the functional independence of Central Banks is protection of its officials for actions taken in good faith. Provisions for protection are not only a common practice in other central banks but also exist in other domestic laws. The amendments, therefore, propose to add a provision for a general protection to SBP officials for all actions undertaken in good faith. In addition, the Monetary and Fiscal Policies Coordination Board is proposed to be abolished, as its terms of reference overlap with the work that has been assigned to the Monetary Policy Committee under the existing Act and such a mechanism for coordination goes beyond provisions in the acts of other central banks. Instead, a new mechanism for coordination is being proposed between the Finance Minister and the
Governor, under which they would establish a close liaison and keep each other informed of matters that jointly concern the Ministry of Finance and the State Bank.
Fifth, the amendments increase transparency in the operations of the SBP and strengthen its governance. To do so, the amendments prescribe qualification and experience requirements, tenure, conflict of interest and disqualification criteria for all appointments, including the directors on the Board of State Bank, members of the Monetary Policy Committee, the Governor and the Deputy Governors. In addition, to introduce a collegial decision-making process, the amendments propose to establish an Executive Committee at State Bank consisting of the Governor and the Deputy Governors.
This committee will be responsible for formulating policies related to the Bank’s core functions as well as those related to administration and management matters, excluding those matters falling in the purview of the Monetary Policy Committee or the Board of Directors. All policy decisions will be taken by the Executive Committee.
And sixth, the amendments enhance the SBP’s accountability by strengthening oversight functions and increasing reporting requirements. In particular, the amendments strengthen provisions related to accountability of the State Bank to the Parliament, constitution of an Audit Committee, designation of a Chief Internal Auditorand appointment of External Auditors. In addition, it is proposed that the oversight role of the Board of Directors of State Bank be strengthened and its scope broadened, including by giving them explicit oversight over the affairs and functions of the Bank; the power to supervise the management, Bank’s administration, operations; and right of access to all activities of the Bank.