Government’s interference makes for a bad case
During the Musharraf era the State Bank of Pakistan practically lost control of its own balance sheet and the government was given a freehand to inflate the economy through printing of notes. In addition, the banking system was encouraged to provide cheap credit for consumption in the private sector to promote consumption-led growth. Violation of the SBP autonomy has unfortunately continued under the elected governments also.
The State Bank needs to be provided sufficient autonomy to enable it to resist pressures to relax or strengthen regulatory standards, or to make its credit policy suit the government or finance government’s budget deficits. The finance ministry must not be given the liberty to manipulate the par value of the rupee at will through dictation to the SBP. As things stand the central bank accepts government’s instructions on monetary matters in violation of law. With the SBP governor dependent on the goodwill of the prime minister for another three-year extension of his tenure and the finance secretary sitting on the SBP Board, the administration treats the Bank as a subordinate department of the ministry of finance. It is widely understood that inflation cannot be controlled without complete operational autonomy of the Bank in conducting an independent monetary policy.
Instead of abiding by the existing laws, the present government has come up with The State Bank of Pakistan (Amendment) Act 2014 which was introduced in the National Assembly early this month. The proposed law is not sufficient to provide full autonomy to the central bank in line with the best international practices. The IMF has also expressed dissatisfaction with the Bill. The Fund thinks that amendments are needed in the proposed law to empower the SBP as the sole owner and manager of foreign exchange reserves, remove government representatives from the SBP Board and eliminate provisions which empower the government to direct a number of SBP activities.
While the government needs to pay heed to the IMF suggestions, there are other equally vital reforms that are required to ensure autonomy for the SBP. The foremost among these is to replace the renewable tenure of three-years for the governor of the SBP, which makes the incumbent amenable to administration’s pressure, with a non-renewable five-year term that may only be terminated for misconduct and that too under a clearly defined legal process. The present provisions in the SBP Act that enable the government to appoint deputy governors of the SBP should also be changed and the board of directors of the SBP authorised to approve the appointment of deputy governors on the recommendations of the governor. The board of directors should mostly be drawn from among leading economists and other professionals and should not be subject to any instructions from the government.
