Will an autonomous SBP deliver?

Will an autonomous  SBP deliver?

If history is any guide, rarely have economic outcomes in Pakistan changed due to mere changes in law

Dr. Vaqar Ahmed

For putting the IMF program back on track, the federal government prepared the State Bank of Pakistan (SBP) Amendment Bill 2021, allowing autonomy for the central bank and promising not to borrow from the SBP. Somehow, this subject has found so much interest in the media and general public that since the past few days many have forgotten the more pressing economic challenges facing the economy. Somehow, SBP autonomy has become far more important than energy, taxes, loss-making state owned enterprises, and balance of payment issues.
If history is any guide, rarely have economic outcomes in Pakistan changed due to mere changes in law. Fiscal Responsibility and Debt Limitation Act is a case in point. It could neither bring fiscal discipline nor limit debt! As part of past fund programs, Pakistan did allow autonomy to several other regulators including National Electric Power Regulatory Authority and Oil & Gas Regulatory Authority, only to take this autonomy back during the PML-N government. The Competition Commission of Pakistan is another example – no political government wanted a strong or rather ‘fully autonomous’ commission. No political government has even gone to that extent of providing Federal Board of Revenue the level of autonomy which SBP currently enjoys.
The opposition parties have criticized that the new SBP law will result in SBP targeting inflation rather than economic growth being the primary goal. This is rather comical as most parliamentarians have never invested time in debating economic growth on the floor. It has never been the priority of any state organ. Planning Commission and Finance Division couldn’t even come out with the promised medium-term development plan. Why then demand economic growth as a policy target from SBP only?
Sometimes back I had argued in ‘Pakistan’s currency troubles’ that to bring down high levels of inflation, Pakistan will need to find a way of increasing the supply of goods and services at competitive prices while keeping the quantity of money at a manageable level. In other words, inflation and economic growth are not unrelated variables.
The bill will in fact do a favor to the poorest of the poor. Domestic price stability i.e. the maintenance of low and stable inflation will result in curbing the current erosion of purchasing power which Pakistanis face today.
While one finds it hard to find what specifically in the bill is against international best practices, there are some additional points which should have been considered. First, the Finance Division’s role in SBP could be further reduced. Currently, the bill suggests that the federal finance secretary will remain on the SBP’s board of governors. Even if this member is deprived of voting rights, allowing him a seat on the table opens the door for intervention. Even the largest economy in the world, the US, doesn’t need to have its Treasury Secretary on the board of the US Federal Reserve System unless there are circumstances that demand such a move. The seven members of the Board of Governors of the Federal Reserve System are allowed a term of fourteen years with Chair and Vice Chair serving for four years.
Second, the expectation in the bill that SBP governor at all times should maintain a mutual agreement with the finance minister and keep him informed, goes against the spirit of autonomy. Third, it is not clear why the appointment of deputy governors should have clearance from the Finance Minister when SBP has its own board which could recommend to the President. Fourth, the role of monetary and fiscal policy coordination forum could have been more imaginatively chalked out. This forum could have allowed a more coordinated response to the structural ills that keep the economy from growing. Pakistan is now consistently performing below the South Asian average economic growth rate. SBP alone will not be able to resurrect the productivity in agriculture and industry.
Fifth, SBP also needs to look into how its own capacities to deliver have eroded over time. The exit of middle and senior tier officials in the past few years has resulted in a vacuum. SBP employees exhibit low morale as many are seen complaining about external professionals landing at top positions while the internally trained cadre is ignored. Finally, the revised version of the bill doesn’t allow immunity to SBP’s leadership from the National Accoun-tability Bureau and Federal Investigation Agency. A related question that emerges from recent experience is: what technical qualification do these accountability watchdogs have to monitor the central bank? For these entities to keep a check on the financial regulator they will need to have greater technical capacities which are not in sight.
—The writer is affiliated with SDPI