THE measures for strengthening autonomy of the State Bank of Pakistan (SBP) can broadly be divided into three categories First, the SBP has to act within the legal framework to realise its operational autonomy.
Second, the executive and legislative branches of the government have to make it possible for the SBP to function as an autonomous institution within the legal framework. Third, additional legislative action is required for this purpose.
The prospect of the SBP becoming operationally autonomous crucially depends on the resolve and competence of the SBP itself. The personality of SBP governor, nature and composition of the board of directors, its support to the governor as its chairman and the professional competence of the staff and its continuous strengthening, have a lot to do with the degree of operational autonomy that the SBP can acquire.
The SBP should continue on its difficult and long journey of institution building in an environment that is not very favourable. In the present fast-changing globalised banking world, the SBP needs to strengthen its own skills through creative and competitive human resource policies. The SBP has complete administrative autonomy, and if it is unable to develop professional expertise, it cannot blame the government.
The core functions of any successful organisation are performed by the middle level professional staff, and it is the responsibility of the SBP governors to create working and career environment to attract, incentivise and retain the best talent. While at times lateral entry at higher levels may be necessary to meet certain skill needs, it is the internal career stream that needs to be developed. In particular, the two core career streams of the SBP related to economic research and banking supervision need continuous upgradation.
In addition, both on the operations and policy side, the positions of deputy governors must be filled through promotion from within, as had been the practice for a long time, so that young officers entering SBP service can aspire to reach at least that level through internal competition and progression.
For the position of deputy governor, institutional memory and work experience in the SBP itself is critically needed, and it can best be acquired through internal training and experience. Lateral entry at these and other senior levels on a large scale is demoralising and disruptive for the regular career staff, and such practices stifle talent from growing from within. Accordingly, an essential requirement for the SBP to function as an autonomous institution is to adopt creative human resource polices to attract, retain and motivate talented staff to work on a sustained and stable basis.
A most glaring error made to keep the position of the deputy governor (policy) vacant for almost ten years, perhaps on the erroneous assumption that an economist-governor does not need the services of a deputy governor (policy). If anything, an economist-governor should have all the more awareness of the need to have a strong economic research team working under a leading economist as deputy governor (policy).
In fact in the past, even some of the non-economist governors had recognised that it is its overwhelming technical superiority with which the SBP can provide advisory services to the government, increase its input in macro- economic policy matters and effectively deal with foreign central banks, governments and multilateral agencies.
Similarly, SBP needs a deputy governor (banking supervision) who has mastery over the latest supervision literature and techniques produced by BIS and similar other professional organisations, and vast experience in bank supervision in the country, and such persons can only be groomed from within.
Skill development is not a one-time affair and there is a need for continuous strengthening of the SBP's banking supervision capacity. The recent banking crisis in Europe and US quite clearly demonstrates the importance of timely and continuous improvements in banking supervision capacity of the regulators.
Section 9A and 9B of the State Bank Act mandates that the SBP central board must be the final authority to approve monetary policy, to set a credit limit to be extended by the SBP to all layers of government, to determine cut off interest rates for government borrowing from commercial banks and to ensure adequate credit to the private sector.
Some serving and retired government economists confuse the matter by stating that section 9A and 9B of SBP Act could be interpreted otherwise. Recently, SBP management has also not fully owned and exercised the authority vested in the central board of directors by the amended charter. There is a need for the SBP management to enhance its understanding of the relevant provisions of the Act and the legislative history, and to make renewed commitment and carry the board with it in enhancing SBP autonomy.
For the SBP to perform its duties as enshrined in Section 9A and 9B of SBP Act, following sequence for the formulation and implementation of monetary policy,(followed by SBP during 1997-99),
must be reactivated* The SBP should advise the government to hold a meeting of the Fiscal and Monetary Policy Coordination Board to agree on the growth, inflation and foreign exchange reserve targets for the coming fiscal year on whose basis all organs of the government and the SBP should make their macro projections of other aggregates.
* The SBP should prepare the estimates of the safe limit of monetary expansion in May for the next year consistent with agreed targets.
* In consultation with representatives of trade, industry, services, agriculture and other participants from the private sector, the SBP should estimate in May the credit requirements of the private sector that would help achieve the agreed growth target