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Price stability missing from SBP bill



In a bid to revive the $6 billion loan programme, the Ministry of Finance had conceded significant ground to the central bank in March this year but in return it could not ensure that autonomy was linked with accountability, missing the key objective of legal amendments.

Two separate drafts of the Ministry of Finance – first based on the ministry’s own working and the second prepared with input from the State Bank of Pakistan (SBP), revealed that the ministry had given up on many issues.

In return, it got only temporary relief in the shape of revival of the International Monetary Fund (IMF) programme for only a three-month period.

The Ministry of Finance accepted the central bank’s position on issues of key appointments and disclosure of financial packages, showed the draft.

The most crucial objective for any central bank is price stability through explicit targeting of inflation but it was missing from all drafts of the SBP Amendment Bill 2021, as the focus turned out to be somewhere else.

A comparison between the Ministry of Finance’s draft and the final draft of the SBP Amendment Bill 2021 revealed that the ministry accepted a majority of the views of the central bank on many issues.

The federal cabinet has already approved the bill and the IMF has now demanded that the bill should be adopted by parliament before December 17, which is the tentative date for IMF board meeting.

The deadline is subject to reaching a staff-level agreement and implementing all prior actions agreed with the global lender.

Under the IMF deal, Pakistan has committed to overhaul the SBP law aimed at narrowing down the central bank’s focus on price stability and ensuring financial sector’s viability.

However, the target of price stability and inflation is not explicitly defined anywhere in the bill, which has made the whole exercise just a consolidation of gains around certain positions.

A key role of the central bank is to use monetary policy to achieve price stability by restricting the inflation rate to a certain level. Many banks in the world have introduced explicit inflation targets.

Sources said that inflation targeting did not figure high during talks with the IMF, although the government had expressed its desire to revise the draft of the SBP bill.

There is also no clause in the bill which can penalise central bank officials if they failed to ensure price stability in the country.

High inflation is the biggest weakness of the government but the legal and regulatory framework remains inadequate despite the central bank autonomy becoming a key issue in Pakistan-IMF talks.

A comparison of the two drafts showed that the Ministry of Finance compromised on remuneration, terms and conditions of service of the governor, deputy governors and other executives.

The ministry had proposed that there should be complete disclosure of remuneration and terms and conditions of service of the governor, deputy governors and executive directors and the fee of non-executive directors and members of the monetary policy committee.

However, this clause was not included in the bill, which the cabinet approved subsequently.

Instead, the approved draft showed that only a consolidated amount of remuneration would be mentioned in the annual financial statement of the central bank.

The finance ministry had also proposed that the chairman of SBP board should be elected by voting members from among the non-executive directors for a period of two years. However, the approved draft showed that “the governor shall be the chairperson of the board”.

Similarly, the finance ministry also proposed the constitution of an executive committee, which shall be responsible for administration and management of the bank, as well as policy matters excluding the issues falling within the purview of monetary policy committee or board of directors.

The executive committee will have a quorum of three members, according to the ministry’s proposal.

The quorum of the executive committee will comprise two members, including the chairman, according to the approved draft. This suggests that the SBP governor and one deputy governor can make decisions on all crucial matters.

The Ministry of Finance had also proposed that in the absence of the governor, the senior most deputy governor would be the acting governor. However, the cabinet draft showed that the governor might designate one of the deputy governors as the acting governor, which would keep matters in the governor’s grip even in his/her absence.

The Ministry of Finance also wanted to have four deputy governors but the final draft showed that there would be three deputy governors.

In another compromise, the finance ministry wanted the governor, deputy governor and non-executive director to be appointed by the president on the recommendation of the federal government.

But the cabinet-approved draft showed that deputy governors shall be appointed by the federal government from a panel of three candidates for each position recommended by the SBP governor in merit order, following early consultation with the minister of finance.

These compromises had been struck in March this year to put the loan programme back on track but the programme remains derailed despite agreeing to these terms. The IMF talks had been scheduled to conclude on October 15 but no IMF statement announcing a staff-level agreement has been issued yet.

Adviser to Prime Minister on Finance Shaukat Tarin said on Monday that the approval of the SBP bill by parliament was the only major remaining hurdle.

“The agreement with the IMF can be reached within two days,” Tarin told reporters five days ago.

Published in The Express Tribune, November 6th, 2021.

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