SBP Clarifies the Draft Amendment Act on Central Bank’s Autonomy

The State Bank of Pakistan (SBP) finally held a virtual press briefing of SBP Governor and Officials on the draft SBP Amendment Act. Over the last few weeks, the potential amendments have caused a lot of controversy among the economic and financial circles in the country.

The primarily contentious issues revolve around the level of autonomy being provided to the SBP, the possible abolishing of refinance facility currently available to the export sector and the construction sector, and the new objectives outline for the central bank.

One of the main reasons behind these rising controversies has been the delay in the SBP making the amendments draft public. As a result, leaked images of the upcoming bill coupled with speculative theories have led economists and political analysts to question the intentions behind it.

Here is what the representatives of the SBP had to say about the bill:

Why is the Draft Bill being kept a Secret?

The Deputy Governor (DG) of the SBP, Murtaza Syed, clarified that the delay in making the report public has not been intentional, but is a result of the parliamentary procedures.

He said, “Once the parliament gets back in session and the draft reaches the standing committees, it will be made public as well”.

Salient Features of the Amendment Act

The Governor of the SBP, Reza Baqir, explained the outline of the bill and that the phrasing of the bill comes only second in defining the role for the central bank, and that the primary objectives for the SBP should only be controlling inflation and maintaining financial stability.

“This is not the first time that the SBP act is being amended, but this may be the first when due diligence is being given to outlining the objectives for the central bank,” he said.

Baqir said that whenever an economy’s central bank is able to control the inflation rate, it leads to financial stability and avoids repeated boom and bust cycles like those that characterize Pakistan’s economy.

“We have had to run to foreign institutions like the IMF over and over because our own economy was not stable enough. But if we can maintain stability on our own, we will not only get out of this cycle of boom and bust over and over, but will also be able to focus more on economic growth, sustainable projects, and overall improvement,” he remarked.

He also said that the autonomy-related clauses are not liberating the SBP from the government’s control either. The 15 appointments, including eight members of the supervisory board, three members of the monetary policy committee, and those of the director and deputy director will still be appointed by the government.

The SBP Will NOT Lend Directly to the Government

The Governor maintained that the SBP will not provide loans to the government directly as a result of this act. He said that the easy way for the Government of Pakistan to make up for the deficit is simply to print more currency.

“In the past 15 months, the SBP has not given any loan to the current government. So once the act passes, nothing will change on practical grounds. In fact, this policy will make the government more financially responsible when they will know that they cannot just ask the central bank for more money, but rather have to address their taxes and financial management to avoid and manage deficit,” he declared.

Repaying loans will also not be the SBP’s responsibility, its representatives said, adding that it is the government’s job. The act will only take away the government’s easy way out by getting more money printed.

The SBP is Not Withdrawing Support from Any Sector

Another notable point of information shared during the press briefing was that as opposed to the prevalent debate, the SBP Amendment Act is not meant for the central bank to withdraw its support from any sector or institution. The phrasing of the act is meant to bind the SBP to not favor a particular institution of the sector over another, irrespective of the priorities of the sitting government.

The DG SBP said that the SBP will not provide any risk insurance to any economic sector, but that does not mean that it will abolish supportive policies like the economic refinance facility that is currently available.

The Great Autonomy Debate

Regarding the heated debate over the amendment act barring institutions like National Accountability Bureau (NAB) and Federal Investigation Agency (FIA) from carrying out any investigations against the SBP, the DG explained that this is only in terms of policy matters.

“If there are concerns about a policy being made and implemented with bad intentions, these organizations can investigate and prosecute SBP, but they will have to obtain the Board’s permission first,” he said.

The DG SBP elaborated that this is not applicable in cases of alleged corruption or downright illegal activities by an official of the SBP.

The SBP Executive Director, Dr. Inayat Hussain, said that running the central bank is not a science. He stated, “It is an art and we cannot have the policymakers worried about their every policy decision being questioned. These policy decisions include policy rate, or banking regulations, etc. That is not to say that any personal unlawful action will also be exempt from accountability”.

What to Expect about the TERF and the RFCC?

Finally, the representatives of the central bank also answered the question of the Temporary Economic Refinance Facility (TERF) and the Refinance Facility for Combating COVID-19 (RFCC) being removed from the SBP’s authorities. Dr. Hussain said that these facilities, as explained in Section 17(2)(a) and 17(2)(d) of the SBP Act, have now been removed, but the facility has not been suspended. In fact, the SBP now has a wider room to provide such financing.

He said that these clauses have been removed on account of being very restrictive.
“Now the SBP can change the security collateral from a promissory note to anything that it deems fit, and may also offer it to other entities other than commercial banks. The SBP may also do it for longer than 180 days. These conditions have been loosened now, but the facility remains,” he said.

Courtesy: Pro Pakistani

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