January 14, 2002	Monday	Shawwal 29, 1422

THE STATE BANK of Pakistan (SBP) was established on the 1st July, 1948 as the central bank of the country and its main functions are as follows:

* regulation and supervision of the banking sector;

* formulation and implementation of credit and monetary policies;

* regulation of foreign exchange regime including exchange rate policy, management and monitoring of foreign exchange reserves, arranging remittances on behalf of the government on account of debt- servicing and debt repayment, etc;

In addition to the above functions, the SBP also undertakes the following non-core functions:

* managing public debt, inter-alia, envisaging purchase/sale of prize bonds and settling claims received from the public on account of prizes won on the prize bonds;

* issuance of national savings instruments like the Defence Savings Certificates, Special Savings Certificates, encashment of these instruments and payment of periodical profits on Special Savings Certificates. As these savings instruments are also issued by the commercial banks. The SBP is also required to collect the sale proceeds of these instruments for credit to the government account and to reimburse the commercial banks of the periodical profits accruing on these instruments and encashment proceeds thereof on behalf of the government.

* arranging sale/purchase/encashment of the TB’s and the Pakistan Investment Bonds on behalf of the government.

* arranging receipts and payments on behalf of the federal as well as the provincial governments;

* acting as a liaison between federal/provincial governments and banks in matters of opening inland as well as foreign letters of credit and settling payments thereunder;

* arranging clearance of payment instruments between the commercial banks.

As per the information disseminated to the public, the present governor, immediately after taking over the charge of the SBP, had developed the feeling that the SBP was so much over-occupied with the so-called non-core functions that it was not possible for it to focus due attention on the core functions. In fact, the idea held was that these non-core operations were really not the functions of the central bank of a country and that the SBP should confine itself to the core functions. An endeavour was, therefore, made to pass on these so-called non-core functions to the National Bank of Pakistan which did not agree to take over the job. Later on, an effort was made to transfer matters relating to the national savings instruments to the Directorate of the National Savings. That department too declined to accept the job for numerous reasons including space and staff problems. The SBP offered to provide its own staff to the Directorate but that was not acceptable to that department because of the vast gap between the salary structure of the government and the SBP officials.

There was thus no option for the SBP to continue with the so-called non-core functions. However, The SBP decided to establish a subsidiary in the name of “the SBP Banking Services Corporation (Bank)- a subsidiary corporation- under the purview of an ordinance promulgated by the President of Pakistan. The Corporation has commenced its operations with effect from the 1st January, 2002.

As mentioned above, the SBP argument for getting rid of the non- core functions was that its preoccupation with these functions left little time for being apportioned to the core functions. There are several departments in the SBP to look after different subjects and each department is headed by a director. The briefs of the correlation between the core subjects and the handling departments is given below:

Regulation and supervision:

Banking Supervision

Department; the Banking

Inspection Department:

Exchange Policy Deptt

Formulation and implementation:

Banking Supervision Deptt

Monetary and Fiscal Research Department

Foreign Exchange Regime:

Exchange Policy Deptt

Exchange rate policy/ Exchange and Debt Management Deptt.

The non-core functions were hithertofore/ will continue in future to be carried on through the sixteen field offices of the SBP (and now those of the “corporation”). In the matter of these functions, these field offices used to report only to the Accounts Department of the SBP (which has partially been put under the subsidiary “corporation” under the new arrangement) in the matter of the so-called non-core functions.

The field offices used to least (or not at all) disturb those departments of the SBP which are engaged in attending to the core functions. Therefore, the argument of the SBP that the subsidiary corporation was created to shed away its pre-occupation in non-core matters in order to focus more attention on the core subjects can hardly be substantiated. Since the subsidiary corporation will still be functioning under the control of the SBP, all fall-out of its operations will continue to rest on the shoulders of the SBP. Then what is the fun in establishing this superfluous body?

India is ten times larger than Pakistan but its central bank— the Reserve Bank of India (RBI) has not experienced any difficulty in catering to the core and non-core issues together. The RBI undertakes additional work of printing currency notes which in Pakistan is got done by the Pakistan Security Printing Corporation Ltd. and casually by the overseas agencies when the Pakistan Security Printing Corporation is pre-occupied with the same or other work assigned to it.

Besides, there are some points on which the Presidential Ordinance creating the subsidiary corporation is silent. The income of the SBP comprised interest and penalties which were collected by the 16 field offices and credited to the head office’s (central directorate’s) account.

These field offices will continue to collect the relative revenue under the new set- up too. But the question is whether the subsidiary corporation will pass on the entire collection to the Central Directorate of SBP or will retain the entire collections for the subsidiary corporation’s account. In the former case, from where the subsidiary corporation will dish out its expenditure and in case the position is vice-versa from where the SBP Central Directorate will provide resources for its expenditure?

There also appears to be some legal lacunae in the presidential Ordinance. The Section 5(2) of the Ordinance provides that “the SBP shall not transfer or delegate any of the functions specified in Section 9A of the Act, including (i ) formulation and monitoring of monetary policies, (ii) regulation and supervision of the financial sector, (iii) foreign exchange regime and exchange rate policy, and (iv) payment and settlement system. The foreign exchange regime is administered in Pakistan under the Foreign Exchange Regulation Act, 1947 (FER Act). The Section 18 of the Ordinance, however, authorises the SBP to, inter-alia, transfer by order in writing its powers under the FER Act to the subsidiary corporation which is contrary to the provisions of Section 5 ibid. This legal lacunae needs to be reconciled.

The defunct Pakistan Banking Council (PBC) was running a training institution in Islamabad under the name of “ National Institute of Banking and Finance (NIBAF)”. With the dissolution of the PBC, NIBAF and its assets were handed over to the SBP. The SBP does have a training department which is headed by a director. The department was located in Karachi. During the regime of the previous SBP governor, it was shifted from Karachi to Islamabad. After the change in the incumbency in SBP at Governor level, the department is now functioning at the both the centres- Karachi as well as Islamabad with richly paid advisor at the helm of affairs of the department. A hefty budget of Rs 800 million has been provided for the training of the SBP employees— old and the newly recruited ones. Is there any rationale for such a huge budget for training of SBP employees alone?

It is now understood that SBP is contemplating to set up yet another subsidiary to take over the training department. Is there any justification for creation of a subsidiary for training department?