THE IMF doesn’t seem happy with the quantum of independence the government plans to give the State Bank of Pakistan to meet one of several benchmarks of the Fund’s $6.7bn loan. The IMF mission chief in Pakistan has made it quite clear that the level of autonomy sought for the bank in the draft SBP (Amendment) Act, 2014 isn’t enough. This newspaper quoted him yesterday as saying that the IMF “may have some reservations and may seek some revisions” in the bill. The issue will be discussed at the third review of the Extended Fund Facility starting from April 30 in Dubai. The trend of giving central banks maximum legal, policy and operational independence has caught on in recent years. The purpose is to rule out political interference in their working that can, and often does, lead to cycles of economic boom and bust. Autonomous central banks are seen as crucial for the sustainable performance of the economy. Transparency in and the credibility of their policymaking process makes market expectations much more responsive to the signals sent out for price and exchange rate stability. The more operational and policy independence a central bank possesses, the more effectively it will regulate financial markets.
Nevertheless, while a few governments are willing to part with their influence over the central bank, the present Pakistan government is certainly not one of them. Finance Minister Ishaq Dar is known for his aversion to the ‘creation of a state within the state’ entailing the surrender of powers that the government has over the SBP. For him, this would mean that, at least theoretically, the government would lose the power to influence the process of determining interest rates, to have an impact on the exchange rate and to favour or punish commercial banks and other financial institutions regulated by the SBP. Once the bank is free of such controls, for example, it may not be easy for Mr Dar to influence the exchange rate through public statements. Any change in the value of the rupee will be determined by the actions that the SBP deems fit to achieve this policy goal for long-term economic stability.
For the IMF, the SBP’s complete operational independence is an important medium-term objective for price stability and the effective governance of Pakistan’s financial markets. Islamabad has taken certain steps in the amendment bill to cut the government’s role in the SBP’s functioning. But the Fund’s reservations indicate that it will not settle for anything less than a completely autonomous SBP. Apart from the previous government’s reluctance to implement value added tax, its failure to increase the independence of the central bank was a major factor in the premature termination of the $11.3bn loan obtained in 2008. It is hoped that differences of opinion on this issue don’t lead us to the same position once again.