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| April 20, 2003 | Sunday | Safar 17, 1424 |
IMF wants more autonomy for State Bank
KARACHI, April 19: IMF is not satisfied with the degree of autonomy granted to SBP under the amended SBP Act promulgated in October 2002.
Acknowledging that the amendments have strengthened the autonomy of the SBP central board in formulation and conduct of monetary policy, the Fund officials say these do not grant “greater responsibility in managing (forex) reserves” as recommended by the IMF.
The amended act provides for appointment and removal (if incapacitated) of the State Bank governor by the president instead of the elected prime minister. It is not seen by the Fund to be enough for meeting the relevant benchmark of the agency’s Safeguard Assessment.
A review report, however, notes that de facto, the State Bank currently seems to exercise full control over reserves.
It is for the first time that the country has built up reserves of over $10 billion, raising the problem of how it should be used most productively. Some of it will go for investment but quite a sizeable portion has to be retained for contingencies to curb speculation and keep exchange rate stable.
The liberalization of the forex exchange regime brings benefits as well as vulnerability because of faster mobility of capital flows it creates and that often turns disruptive. Along with commercial banks, the central bank has become an active participant in inter-bank market, as home remittance soar beyond anticipation, stopping earlier purchases from the kerb.
With the local exchange markets integrated into the global market, the vulnerability increases because of speculative nature of currency business. “The global flow of foreign exchange has reached the incredible figure of $2 trillion per day, 98 per cent of which is speculative,” writes Prof Paul Streeten of Boston University in a recent article in Finance and Development published by the IMF.
The free float of the rupee, convertibility on current account in inter-bank market and for capital account in kerb for individuals and for capital flows in the form of portfolio investment indicate the level of financial integration. These provide ample opportunity both for flight or reverse flight of capital. However, capital account is not convertible.
The IMF’s plea for autonomy for the State Bank has to be seen in the context of the liberalization of the exchange regime. As the US is the most important shareholder of the IMF, the reserves have to be kept in a weakening dollar and not in euro steadily gaining strength. And the reserves have to be invested in low yielding securities offered in the developed markets but not better yielding government papers issued by developing states.
For whose benefit should the autonomy of the State Bank be granted and exercised is a moot question. Can the State Bank take an independent decision to substitute dollar in any significant way, by euro for building up reserves? Even before the military victory, the Americans started floating the idea that dollar will be used alongside the Iraq dinar, possibly for oil trade, instead of euro as was the case during Saddam’s regime.
The IMF needs SBP autonomy to facilitate a liberalization agenda to integrate Pakistan into the global financial system, designed to induce capital flows to world financial centres from where these funds are distributed to the periphery.
It is the domestic demands and not external pressures that should govern the external sector policies. An important factor that should also be kept in view is that the ageing global financial system as indicated by frequent fiscal crises, rising stocks of unsustainable debts, interest rate crash and shrinking dollar value, is ripe for a change.
No doubt, finance capital still tends to dominate the global economy. The multilateral donors shape the macroeconomic policies of many countries. In Pakistan, the State Bank formulates policies in close consultation with leading commercial banks and specially the Pakistan Banking Association (PBA). It may not have be a mere incidence that in the critical phase of recent financial reforms, the bankers elected Zubyr Soomro, country head of Citibank for two consecutive terms. Zubyr is a shrewd banker with persuasive skills. Citibank is known for its global clout, second only to multilateral donors. The outcome has been positive for banks: Tax disputes have been resolved and taxes have been reduced with the IMF support.
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