Governor to submit annual report before Parliament

ISLAMABAD: The government has proposed through the State Bank of Pakistan amendment bill 2021 strengthening of accountability through parliament as it binds the governor SBP to submit the annual report before the parliament regarding the achievement of the bank’s objectives of maintaining price stability.

Under the proposed SBP amendment bill 2021, the governor SBP shall submit an annual report before the parliament regarding the achievement of the bank’s objectives, conduct of monetary policy, state of the economy and the financial system.

In addition, the parliament may require any senior official to attend at such additional times as may be required. The bank shall, not less than twice a year, publish and submit to the parliament and the minister of finance a state of the economy report.

The SBP amendment bill proposed that quasi-fiscal operations, defined as monetary actions taken on behalf of the government, shall be discontinued. However, refinancing facilities, which the SBP has used to support access to credit in under-served sectors, will still be allowed.

The proposed bill has restricted the government’s borrowing from the central bank as there will be no new government borrowing. The policymakers argued that the direct borrowing from the central bank fueled inflation, so the SBP will continue injecting money through OM operation for providing money to banks in order to develop secondary market for meeting the government’s financing requirements. The international experience showed that it caused less inflationary pressures.

However, Dr Kaiser Bengali, a renowned economist, stated that the bill to amend the “State Bank of Pakistan Act 1956” is exceptionally dangerous for the economy and the country. To date, the State Bank is an arm of the State and serves to address the State policies. The amendment will make the State Bank autonomous from the State domain and reverse the relationship: it will be the State that will be legally obliged to feed the State Bank.

The bill is dangerous on three principal counts. One, it excludes any government representation on the State Bank Board of Directors. Two, it defines inflation control as the exclusive objective of the State Bank – to the virtual exclusion of the overall objectives of promoting development. And three, it compels the government to prioritize meeting the country’s foreign debt obligations over all other expenditures.

The Bill explicitly declares: “The primary objective of the Bank shall be to achieve and maintain domestic price stability”. The inflation control objective is to be pursued for its own sake and “… supporting general economic policies of the federal government with a view to fostering development and fuller utilization of the country’s productive resources” has been relegated as a “tertiary objective”.

Effective macroeconomic management, he said, requires monetary and fiscal policy to be administered in tandem with each other. However, the bill will render monetary policy the exclusive domain of the State Bank and fiscal policy the domain of the federal government, thereby, delinking the administration of monetary and fiscal policy and, consequently severely compromising macroeconomic management, he added.

Admittedly, governments have behaved irresponsibly over the last four decades in borrowing recklessly to finance non-development, including defence expenditures. However, borrowing can also be a financing option for development purposes to create economic infrastructure assets. This the government will no longer be able to resort to. Development – and employment creation and poverty reduction – will cease to be an active agenda of the government, he maintained.

He said that the bill will disallow the government borrowing from the State Bank. Of course, it will be able to borrow at costlier commercial rates from commercial banks, which will itself receive monetary assets from the State Bank. Thus, a…