SBP Amendment Bill 2021: What is it all about?

Recently, business circles in Pakistan have been discussing the new SBP Amendment Bill for the year 2021. The government has recently passed the SBP Amendment Bill to give more autonomy to the central State Bank. Primarily, the reason behind the passage of this bill is the IMF. To revive the stalled IMF plan, the agency has set up 31 conditions which include giving more control to the central bank (Rana, 2021). In this article, I will dissect the proposed bill and also explain some concerns with it.

Through this bill, a major change has been proposed in the responsibilities of the central bank. As of now, the prime objective of the SBP is to support economic growth and stability of the monetary and financial system. But the government now wants the main objective of SBP to control the domestic price stability. SBP is likely to use inflation targeting. It’s a technique in which the central bank makes a projected target of inflation and then adjusts the monetary policy to achieve the rate. For this very purpose, a new clause has been added to the bill. Price stability will now be the primary objective and supporting economic policies will be the tertiary objective.

Another major change is the abolishment of the Monetary Policy and Fiscal Coordination Board. The abolishment of the board will ensure that the government can no longer interfere in SBP’s independent implementation of monetary and exchange rate policies (Hassan, 2021). Another reason for the dismantling of the board is to reduce the political influence over the central bank.

Accountability Mechanism:

In the current bill that is governing the SBP, there is no provision of accountability. In the new bill, it is clearly stated that the State Bank Governor should submit a performance report annually. Strangely, the act provides immunity to the Governor, Deputy Governor, executives, and other committee members from National Accountability Bureau (NAB) and Federal Investigation Agency(FIA) (Rana, 2021). Over years, there have been cases where NAB and FIA have harassed institutions which in consequence have stopped foreign investment.

Technical Specifications:

Over the years, the Pakistani government has spent generously to appease voters and then borrow from SBP to finance it. To encourage growth the government will play with the interest rates and lower them. This has given rise to a growth and bust cycle. The economy will grow due to lower interest rates and high imports, and after a few years, the cycle will burst (Khawar,2021). To overcome this trend the SBP will “not extend any direct credits to or guarantee any obligation of the government, or government-owned entity or any other public entity”.

Concerns:

Critics of a fully autonomous SBP fear that the bank will have excessive power over the economy and design policies that can be cynical for the economy. There can also be tensions between the government and the SBP. For instance, a government comes into the power to create jobs and boost growth. To achieve these aims a lower interest rate is preferred but the central bank can decide to keep the interest rates high.

Inflation targeting has been successfully implemented in developed countries, where it has successfully achieved economic growth, but there are concerns about the impact of growth in a developing country such as Pakistan.

While the government decides to make SBP a more autonomous institution, the autonomy must be complemented with transparency, fiscal and monetary policies that reflect comprehensive economic growth.

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About the Author

Suhaib Shaukat

Suhaib is currently doing Foundations at the University of Nottingham, Malaysia. He loves to read about politics and business. He hopes to serve the public in future and wants to become a civil servant in the future. Suhaib also serves at IGNITE (UNM Student Magazine) as a News Editor.

Reference:

Hassan,J (2021) SBP autonomy must be complemented with broader economic growth [online]. Islamabad. Arab News. Available at: https://www.arabnews.pk/node/1828041#.YFR83slOziU.twitter [Accessed 25th March 2021]

Rana,S(2021) Govt proposes absolute autonomy for SBP [online].Karachi: Express Tribune Available at: https://tribune.com.pk/story/2288336/govt-proposes-absolute-autonomy-for-sbp [Accessed 25th March,2021]

Khawar, H (2021) Demystifying amendments to SBP Act [online]. Karachi: Express Tribune Available at https://tribune.com.pk/story/2290823/demystifying-amendments-to-sbp-act

[Accessed 25th March 2021]