The bill entailing provisions of autonomy for the State Bank of Pakistan (SBP) has stirred conversation on the role and independence of the central bank.
The full draft has not been made public. The lack of transparency on the part of the government is questionable and gives a chance to many to instill fear.
It is crucial for any regulator to have autonomy to perform effectively. However, such autonomy has to come with appropriate frameworks for performance accountability.
The economy and the public sector of Pakistan face issues of informal processes. On the ground, processes are carried out differently than the prescriptions on the piece of legislation.
For instance, the government passed the Public Finance Management Act in 2019, but there has been negligible implementation of the Act. Similarly, the Fiscal Responsibility and Debt Limitation Act (FRDLA) is virtually ineffective.
How can we expect the legislation on the State Bank autonomy to be fully implemented?
In the case of any governor taking action against the will of the government, they can change the law at any point in time like the current government removed Dr Tariq Banuri, Chairman of the Higher Education Commission (HEC), unceremoniously due to differences over his commendable reforms to improve higher education.
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Many governors have also been resigning (or forced to resign) due to differences with the governments. We also know a finance minister who used to give the target of maintaining the exchange rate at 100 and the SBP governors complying with the directives despite having sufficient independence. Thus, there is a need for allowing sufficient protection to the SBP to not become a lapdog of any political government.
Hence, the appointment of the SBP governor becomes crucial. The current practice of appointing the governor is flawed. The onus of the appointment primarily lies on the PM and finance minister, who later get it approved from the president by putting his ceremonial stamp.
I would advocate establishment of a bipartisan parliamentary committee, like for judicial appointments, which should ratify the proposal forwarded by the federal government.
There is no doubt all regulators need autonomy and I have advocated the same in my earlier piece in this newspaper titled “Regulators in Pakistan – watchdogs or lapdogs”.
However, what we need to understand is how to hold regulators accountable. Who should regulate the regulators?
I am not advocating supervision of regulators by a ministry. But there has to be some form of supervision.
Presenting an annual report about the “achievement of the bank’s objectives, conduct of monetary policy, state of the economy and the financial system before parliament” may be considered as transparency but it hardly qualifies as accountability.
The usual practice of appointing an independent board of the SBP will also not work. We need accountability by public representatives with the aid of technical professionals.
Monetary policy limitations
Furthermore, the huge informal economy in the country puts limitations on the monetary policy. Therefore, an aggressive monetary policy to curb inflation may have partial effectiveness. Hence, financial inclusiveness should be top priority of the SBP.
Inflation stability is an important indicator of macroeconomic performance, but this is not the only way to improve macroeconomic performance of the country. Hence, the proposal to abolish the Fiscal and Monetary Policy Coordination Board should be deleted from the draft bill.
Similarly, there is no mechanism and clarity in the draft law about the process and mandate of setting targets of inflation.
The current draft amendments attempt to give autonomy to the central bank from politicians and the bureaucracy. But these do not address the larger issue of how the State Bank can also become a lapdog of private banks. The SBP has successfully safeguarded the interest of private banking institutions in the country over the last two to three decades. However, it has miserably failed to encourage risk taking in the private sector lending arena.
Getting credit card is an impossible feat for most people in this country. Do not blame private banks for this, hold the SBP accountable. This is just the tip of the iceberg in the performance of the banking sector.
The SBP has also been performing poorly in terms of international transactions. There is no such discussion happening under the current reforms and how the government can steer economic development without close coordination with the SBP.
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On the brighter side, the draft proposes to cut direct borrowing of the government from the SBP. However, without necessary fiscal reforms, the government will continue to borrow from private banks, giving huge benefits to the sector while leaving limited credit for the private sector or crowdsourcing borrowing from people and discouraging investment in productive activities.
We must realise the importance of an autonomous SBP, but it should come with an appropriate framework of accountability against clear performance targets.
Moreover, the government needs to improve its communication with the public. Sitting in a few talk shows will not help to generate a serious debate on this issue.
Policy communication is quite different from hiring a few digital activists to advance the government’s narrative. The government needs to develop this capacity and the process for informing the general public about its future endeavours on this and other important issues.
The writer is a public policy adviser and researcher having interest in public sector governance, cities and entrepreneurship
Published in The Express Tribune, April 19th, 2021.
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