KARACHI, July 23: The IMF and the World Bank have recommended that the State Bank should disclose more details of its lending to the federal and provincial governments.
"The terms and conditions, including maturity and interest rates, of individual SBP advances to the federal, provincial and local governments should be fully disclosed on a regular basis," says an IMF/World Bank report.
The report titled Financial System Stability Assessment was prepared by a staff team of the IMF and the World Bank. But the IMF has made it clear that the views expressed in it do not necessarily reflect the view of the government of Pakistan or the executive board of the IMF. The report released on Thursday was completed on June 8, 2004.
The recommendation for the SBP to disclose full details of its lending to the government sector is contained in that part of the report which has assessed the observance of IMF code of good practices on transparency in the monetary policy. The assessment is interleaved with words of praise for the State Bank for observing most of the IMF-recommended good practices in its monetary policy.
The authors of the report have noted that the actual terms of the SBP advances to the federal, provincial and local governments are not publicly disclosed. They have also noted that under the SBP Act, the maturity of advances granted to the government by the SBP cannot exceed three months.
The range of interest rates on these advances are disclosed in the notes to the audited financial statements contained in the annual report. But "the actual detailed terms, including maturity, however, are not disclosed." The aggregate amounts of the government borrowings from SBP are, however, publicly disclosed on weekly basis.
Senior bankers say that the market would benefit from disclosure of full details of the SBP lending to the government sector. "This would give the market a sense of direction in the movement of interest rates," said treasurer of a local bank.
They say that disclosure of maturity and interest rates of the government sector borrowing from SBP would also make it possible for the market to assess the impact of the monetary policy on government borrowings.
These bankers say that during the last fiscal year the government emerged as a key beneficiary of low interest rates as it retired expensive domestic debt gathered through National Saving Schemes by cheaper borrowings through treasury bills.
Sources close to the State Bank say this was one of the reasons why the SBP waited a bit longer than it should have, before allowing a gradual hike in the treasury bills rates.
But central bankers say SBP started allowing a gradual rise in T-bills rates after it had become a must to contain rising inflation. The IMF/World Bank staff report also raises a key issue concerning the independence of the central bank.
It recommends that the SBP Act should be modified to either eliminate the prerogative of the federal government to supersede the SBP's central board of directors or by clarifying the instances where the SBP would fail to reach its objectives.
What has prompted the IMF/World Bank staff to make this recommendation is that under the SBP Act, the federal government can override SBP decisions by superseding its central board of directors with an agency chosen by the federal government. The government can take this measure if, in its opinion, the SBP fails to carry out any of the obligations under the SBP Act.
"While the SBP Act publicly discloses the mechanism through which the decisions making body of the SBP can be removed by the federal government", the specific conditions under which this can be done "are not specified and left to the arbitrary judgement of the federal government."
"The threat to replace the (SBP) central board of directors with an agency chosen by the federal government could significantly reduce the degree of independence of the SBP, and ultimately the transparency of the policy decision making process."