THE changes suggested in the existing SBP Act should place the central bank in a better position to control price inflation and manage currency through an independent determination of its monetary and exchange rate policies as per international best practices. The changes approved by the cabinet the other day will reset the State Bank’s core function and prevent frequent political intervention in its working. If parliament clears the changes, the bank will acquire vast powers to solely focus on its new function of domestic price stability without having to support the government’s economic growth target. It will, nevertheless, continue to indirectly foster growth and help a fuller utilisation of the nation’s productive resources by fighting price inflation and ensuring financial stability by using its policy tools.

Though the target inflation rate for the bank to achieve will continue to be set by the National Economic Council, the government will no longer be in a position to dictate monetary and exchange rate policies. Previously, we have watched the State Bank functioning as an adjunct to the finance ministry with its governors obtaining ‘advice’ from the government or easily succumbing to pressure, without thinking of the consequences for prices and financial stability. We have, for example, seen the bank go out of its way to interfere in the market and spend billions to maintain the exchange rate at the level suggested by the previous PML-N administration at the cost of exports and foreign exchange reserves. Not only that, it would not hesitate to print huge amounts of money to lend to the government and fuel inflation. Likewise, an independent view by the bank of the economic and financial trends and a critical analysis of government policies in its reports have been rare. There are many instances where central bankers were sent home if they took a stand. If the changes are approved, the situation is expected to become better.

The draft law also proposes sweeping administrative and other powers for the State Bank governor besides guaranteeing his tenure that has been extended from three to five years with the possibility of extension for another term. This is understandable because no one can steer the bank without complete administrative freedom and guaranteed tenure. Nonetheless, these kinds of powers also anticipate a strict evaluation of the candidates for the top office and their accountability by parliament. Parliamentary evaluation is crucial to ensure that the right person is chosen for the job after a thorough debate by the people’s representatives who should also have the power to fire them if they find their performance below par. Clearance of their appointments by parliament will empower them further in executing their mandate. Hence, it is advisable that the government revisit the draft law and change the method of selection of the State Bank governor in line with international democratic practices.

Published in Dawn, March 11th, 2021