IMF conspiracy? Key takeaway points from the SBP briefing
Since it first leaked to the public last week, the news of a proposed amendment in the central bank’s status has become a topic of national discussion. Some critics have gone so far as to call it an IMF conspiracy to break Pakistan while others thought it was against our national interest. With the debate heating up, the State Bank of Pakistan clarified on Monday what the proposed amendments are and why they are needed. The following are key takeaway points from a virtual media briefing it held.
The draft bill, the SBP Amendment Act 2021, has been passed by the National Assembly and is currently being discussed in parliament. It is open for debate and hasn’t yet become law. It will be up to parliament to strike it down, make changes to the draft or approve it as proposed.
In a nutshell, the proposed changes will give more autonomy (read: power) to the central bank, both in terms of defined policy goals and appointments, minimize government (finance ministry) and political interventions, and ensure partial impunity for SBP officials from federal and provincial investigation agencies in case of any alleged wrongdoing.
What changes have been proposed and why in the SBP Amendment Act 2021
Speaking to the media, SBP Governor Reza Baqir said they would like the SBP objectives redefined in the following order of priority: ensure price stability (fight inflation), provide financial stability to the financial sector, and support the government’s economic growth policy.
Aren’t all of these the SBP’s defined objectives already? To this, the SBP says the existing goals do not specifically mention price stability as the top priority. According to the SBP, the order of priorities matters because historically our policies had short-term vision, which is why no growth spurt sustained longer, forcing us to seek the IMF’s help every few years. “We need to come out of this boom-and-bust cycle and break the begging bowl,” Baqir said.
What about the nearly 2 million people entering the job market every year that, too, amid a high unemployment rate? The governor says there is overwhelming evidence that countries where the central bank has more autonomy with price stability (controlling inflation) tend to do better in the long-term.
Putting growth at number three doesn’t mean it is being excluded, it is still important, the SBP says, adding that central banks can’t achieve both goals simultaneously because targeting one undermines the other.
Secondly, if economic growth doesn’t have price and financial stability, it will not last long. The SBP will support economic development policies as long as there is price stability, it says. Whether to make this change or not can be debated, but having the SBP objectives clearly defined will improve accountability of SBP officials, it said.
Another amendment the SBP has proposed is to stop giving loans to the government. “This is nothing new and it has been going on for the last 15 months,” Baqir says. There is enough evidence to suggest that when central banks finance the federal budget by printing more currency, it not only leads to inflation but also gives the government an easy way out because it doesn’t improve fiscal discipline.
At the center of this discussion remains a proposal in which critics believe the SBP has sought impunity from legal proceedings by the Federal Investigation Agency, National Accountability Bureau and other federal and provincial agencies against SBP officials in case of any wrongdoing. Governor Reza Baqir says this was incorrect and so was the notion that the central bank is being taken away from the government.
The central bank has only proposed that no action should be taken against its officials without the prior consent of the SBP’s Board of Directors. This doesn’t mean complete impunity, it says.
On seeking more autonomy, the governor said they are still part of the government as the eight-member SBP advisory board, three-member monetary policy committee members, three deputy governors, and the governor all are appointed by the government and this will not change.
But why do they need protection from the FIA, NAB and the like? The SBP says nowhere in the world do such agencies investigate central banks because they are not equipped technically to do so.
It also says that sometimes the SBP has to take bold decisions against “bad banks”, many of which are owned by powerful people. The SBP officials take a big risk when they go after them. If this protection is not given, the competent people will not join the SBP and if they do, they won’t go after any powerful institution.
Among other concerns, is the proposal to discontinue quasi-fiscal operations. Presently, the SBP is mandated to carry out quasi-fiscal operations, including rural credit, industrial credit, export credit, loan guarantees, and housing credit. Won’t stopping these facilities hurt the very sectors that are our economic backbone? The SBP clarified, however, that refinancing facilities, which the Bank has used to support access to credit in underserved sectors (agriculture) will still be allowed. However, the SBP won’t give risk insurance in refinance as the risk should be on banks, it said.
If approved, this amendment will be the fifth in the central bank’s role or objectives, which were first defined in the State Bank of Pakistan Act, 1956. Previously, amendments (changes) were made in 1994, 1997, 2012, and 2015. Curious what else has been proposed? You can read salient proposed changes here.