Elusive SBP autonomy

Published September 29, 2014

IN 1997, there was a great deal of jubilation amongst economists working in the research department of the State Bank of Pakistan over the granting of autonomy to the central bank for framing the monetary policy in the country’s best interest.

However, a few people — having an in-depth knowledge of the working of political governments and the bureaucracy — were not at all moved. They were of the view that given the nature of governance, how could a central bank be independent of the government’s influence.

The main objective of the initiative was to limit the borrowing of the government from the banking system so as to make the maximum amount of funds available for the private sector —the real engine of growth and employment.

To enforce this, constitutional protection was provided for tenure of the slot of the SBP governor. In the initial SBP draft, the chief executive was to be appointed for only one term of five years, supported by a competent and independent board of directors representing agriculture, industry and the provinces.

However, the bureaucracy apparently increased the tenure of the governor to six years, but slashed that into two terms of three years each. After the expiry of the first term, the governor was to be re-appointed. The tacit purpose of this change was to reduce the tenure from five years to three years.

Secondly, the Monetary and Fiscal Policy Coordination Board (MFPCB) was set up under the chairmanship of the finance minister, of which the SBP governor was a member. The Board was required to coordinate fiscal, monetary, foreign trade and exchange rate policies and ensure consistency amongst various macroeconomic targets.

Thirdly, it was made mandatory for the SBP to prepare quarterly reports on the state of the economy for onward submission to parliament. Theoretically, it was a comprehensive agenda to make the central bank independent in the conduct of its policies and responsible for the outcomes of its operations.

After two years of the Autonomy Act, democracy was replaced by military rule, but there was complete understanding between the central bank and the government not only with regard to borrowing from the banking system, but also in case of relationship with the IMF and the World Bank.

With the restoration of democracy in 2007, the fragility of the autonomy apparatus became obvious when the political government embarked upon a ruthless programme of bank borrowing. It was claimed that, on average, the government borrowed around Rs1bn daily from banks. The next political government, despite being critical of this act of its political opponent, walked even faster on the track of borrowing from banks.

During this six-and-a-half-year period, the SBP mainly worked as a central bank of the sitting government at the cost of the national economy. The submission of the SBP to government pressure for more funds could be explained to some extent, but its helplessness before commercial banks is simply not understandable. It could neither persuade banks to pay a fair rate of return to their depositors, nor could it motivate banks to enhance their financial outreach to farmers and SMEs.

Though having fallen a bit recently, the banking spread — difference between the deposit rate and the lending rate — is still perhaps the highest among developing countries. It is a great bonanza to make money while borrowing at 6pc from farmers and lend them back at over 14pc. The SBP’s quarterly reports mention the weighted average rates of borrowing and lending of commercial banks, but the central bank never takes any remedial measures in this regard.

Now there is again uproar from the SBP and the IMF for amending the Autonomy Act of 1997, where the axe of change hangs on removing the finance secretary from the SBP’s board of directors, while adding two competent economists as members of the board. Would this removal and inclusion make the central bank strong enough to restrain the government’s borrowing from banks? And what to do with the MFPCB, where the finance minister is the chairman and the SBP governor a member?

The government currently does not retire previously borrowed money to banks from its own income and revenues. Instead, the SBP has to arrange new loans for the government so it could retire earlier loans. And if commercial banks do not bid for the desired amount in the auction or bid at a higher rate of return, then the SBP has to provide money from its own vault by itself investing in T-Bills.

Under such circumstances, how could a central bank, with whatsoever autonomy and independence it commands, refuse to accommodate a sitting government which is almost always caught up with unusual economic and social disorders like fighting against terrorism, rehabilitating victims of earthquake and floods, and coping with strikes and sit-ins.

If any measure of real autonomy is to be achieved, there is a need to redefine the role and scope of public debt management by the SBP.

To meet the government’s ever rising appetite for funds, the SBP should explore new avenues of non-bank borrowing by offering better rates of return to attract heaps of money currently being speculated in stock markets and dumped in the real estate business.

The writer is the President of the Institute of Banking and Business Learning Lahore

munir1951@hotmail.com

Published in Dawn, Economic & Business, September 29th, 2014

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