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State of Pakistan Approves Central Bank Independence?

Central Bank Independence
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EDITOR NOTE: Providing aid to a country in need seems like a noble and admirable Good Samaritan response. Such is the case with the International Monetary Fund (IMF) and Pakistan. But what’s really happening here is that the IMF is mandating changes in the way Pakistan runs its central bank and, to a certain extent, its government. The IMF is virtually dictating how a country should run its business, figuratively speaking, in exchange for aid. We can expect the IMF to continue doing the same with all of the “poorer” nations requesting its aid. If this is how the IMF offers its assistance, then it would only be prudent to remain suspicious as to what they would do with the all central banks across the globe if their unit of account--the Special Drawing Right (SDR)--begins circulating as the world’s reserve currency. It’s hard not to suspect that such a position isn’t in their agenda. Should they ever achieve this goal, the only monetary assets that would remain out of their grasp would be gold and silver--another reason why non-CUSIP precious metal coins and bars make for a prudent hedge against any economic uncertainties, especially ambitious institutions like the IMF that aim to control the global monetary environment.

The Pakistani cabinet approved a draft central bank law on March 9 that establishes the independence of the State Bank of Pakistan, according to media reports. The proposed legislation will change the mandate, governance and autonomy of the SBP, the Express Tribune newspaper reports. The Pakistani government committed to central bank reforms as part of an $6 billion International Monetary Fund loan agreed in July 2019. The cabinet will now present the law, the State Bank of Pakistan Amendment.

The Pakistani cabinet approved a draft central bank law on March 9 that establishes the independence of the State Bank of Pakistan, according to media reports.

The proposed legislation will change the mandate, governance and autonomy of the SBP, the Express Tribune newspaper reports. The Pakistani government committed to central bank reforms as part of an $6 billion International Monetary Fund loan agreed in July 2019.

The cabinet will now present the law, the State Bank of Pakistan Amendment Bill 2021, to parliament. The National Assembly does not yet list the bill on its calendar of laws introduced by the executive.

Upon signing the July 2019 agreement with the IMF, the Pakistani government and the SBP committed to amending the 1956 statute governing the central bank. The proposed law would establish “price stability” as the SBP’s “primary objective”, and grant the bank “full operational independence” to achieve price stability.

However, the law does not appear to give the SBP the power to set an inflation target. Rather, Pakistani media suggests the National Economic Council will set the target. This body, established by Article 156 of the constitution, is chaired by the prime minister and has a planning role.

Under the current law, the central bank’s mandate is “securing monetary stability and fuller utilisation of the country’s productive resources”. A 1994 amendment to the State Bank of Pakistan Act created a Monetary and Fiscal Policy Co-ordination Board, chaired by the minister of finance. Its role is to “co-ordinate fiscal, monetary and exchange rate policies”. The amended law would abolish this board.

The government also pledged that it would extend the term of the governor, “delinking it from the electoral cycle”, and improve the internal governance of the bank. Currently, SBP governors serve three-year terms. The incumbent, Reza Baqir, took office in 2019.

The new measure would extend the term of the governor to five years. The board would also gain the power to control the central bank’s budget and accounts.

The central bank would no longer be allowed to lend directly to the government. The new statute also bars the central bank from rolling over existing debt. According to the IMF’s July 2019 report, the central bank was at that time providing funding to the government equal to 20% of GDP.

The amendments would grant wide civil and criminal immunity to the SBP and its senior officials. They grant immunity from civil and criminal actions to “the bank, board of directors or members, governor [and] deputy governors”, according to the Express Tribune.

However, newspaper Dawn reports that the auditor-general will still be able to audit the SBP. The central bank will present annual reports to Parliament on its activities.

The law would also bar investigations of current or former SBP officers by the National Accountability Bureau, an anti-corruption agency, and the Federal Investigation Agency.

Delays and disease

The Pakistani government initially undertook to introduce the new central bank law by December 2019. When the IMF held its first review of the loan in that month, it had agreed to push back this deadline to March 2020.

According to the Express Tribune, the State Bank sent a draft bill to the ministry of finance in March 2020. However, the finance ministry and the central bank failed to agree on its provisions. This delayed approval by a cabinet legislative committee. The finance ministry then submitted the bill directly to the cabinet, bypassing this committee.

In the meantime, the Covid-19 pandemic struck Pakistan. In April 2020, the IMF approved $1.4 billion in emergency finance for Pakistan. The country’s economy contracted 0.4% in 2020, according to IMF figures which showed growth slowing already in 2019.

The pandemic effectively stalled the 2019 loan programme, which falls under the Extended Fund Facility and requires periodic reviews. The IMF and Pakistan had only completed the first of these reviews when the pandemic began.

The IMF negotiated “an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform” with Pakistan last month.

Originally posted on Central Bank

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