The Pakistani cabinet recently approved the “State Bank Amendment Act 2021” which promises sweeping powers for the State Bank and offers greater autonomy. Unsurprisingly, this move has received criticism, most notably from those who believe that this move would make Pakistan subservient to foreign agencies and conspiracies. Others criticize the move towards making the state bank an independent entity causing destabilization within the country.
The first thing that must be understood is that there is a world of difference between ‘Independence’ and ‘Autonomy’. The said act proposes to give the State Bank more autonomy but it does not propose for it to be an independent organization. The layout within the framework is similar to the layout present in most countries. State Bank autonomy is a positive step towards the right direction – and the people of Pakistan need to comprehend the fact that an autonomous Central Bank is the requirement of a modern economy.
One of the most often mentioned positives of having an autonomous Central Bank is the reduction in inflation. And this is seen in nearly every country where autonomous Central Banks have led to reduced inflation and controlled Central Banks have led to high inflation. Most economists argue that a controlled Central Bank has a negative impact on the economy due to the constant political interference since politician often give preference to short-term goals at the expense of long-term gains for the sole purpose of re-election.
We see this with the flawed economic policy of controlled pricing of the Dollar rate during the government of 2013-2018, by burning through central reserves – causing economic mismanagement and forcing Pakistan to take loans for debt servicing. Another political interference found is on interest rates. Governments interfere in interest rates commonly to reduce unemployment. In the simplest of terms, a lower interest rate leads to more borrowing by businesses, which causes increased investment or work hire capacity leading to lower unemployment – and while this sounds great on paper, in practice it has a negative impact on the economy. Increased borrowings at lower interest rates lead to low interest returns for the banks. This also reduces the purchasing power of the country and creates lower savings rate since most people find no incentive in savings – leading to lower internal investments in the long run for the country. Lower interest rates are often used to influence growth but when political parties interfere, their focus is to provide an answer to the promises they made. So a lower interest rate causes inflation and in economies where there is stagflation, we witness rising unemployment and rising inflation. This constant interference by the government wreaks havoc on the economy. And it is due to this interference by governments for decades that the IMF predicted in 2020 that Pakistan could be headed for stagflation with an inflation rate of over 10% and a growth of 1%.
The Act contains several sections which can allow for greater economy - and we can see this where, for instance, the governor will be appointed by the President for a period of 5 years. This is extremely important since government meddling made the post extremely unreliable. Post Musharraf, Pakistan has had 6 governors during the period from 2009-2020, where most barely held the post for 1.5 years and the longest was Ashraf Mehmood Wathra who held for 3 years. This made it impossible for any governor to bring any monetary reforms or new ideas and if anybody did bring anything new to the table, they would immediately find themselves removed.
The posts of deputy governor and non-executive directors shall be appointed by the federal government but the act places a bar that no Member of Parliament or political party shall be accommodated to these positions. This will make sure that there is little political interference in the state bank. The governor can be given an appropriate and due term to bring forth a forward-looking economic policy and the removal of the governor can only happen under the conditions mentioned in section 13 – allowing for a more stable State Bank policy to be formulated and implemented.
Extremely important to notice are the changes in the Preamble which amended the previous responsibility of regulating the monetary and credit system and fostering growth, replacing it with the lone and primary objective of price stability. And they will have the absolute freedom to determine and implement monetary policy and formulate the exchange rate policy. The bill includes other objectives such as encouraging development along with utilization of resources available to the country. This will allow for the State Bank to operate in an independent and proper manner, allowing for a more stable economy.
Autonomy is useless if the power of the legislator remains to amend the Act again and place controlling frameworks on the Bank. To address this, the bill includes Section 46B sub-section 8 which bars parliament from passing any legislation that relates to the Bank without prior consultation. This will secure the amendment and the autonomy thus provided for the Bank.
A major reason for the political interference within the State Bank are the borrowings that a state takes from the Bank itself. And to make sure the government is able to capitalize the most on this, the ruling party interferes, asking for reduced interest rates and then borrowing a lot of capital towards short-term development. This creates internal debt and weakens the economy considerably. Many states keep a controlled Central Bank so that they can borrow anything, anytime at any rate – whereas more independent Banks have the power to refuse the government any borrowings. This has been witnessed in the US, Turkey and India in recent times. Pakistan has looked to implement such a restriction so that the government cannot impede the working of the State Bank. And for this the new amendment looks to bar the government from borrowing loans and even restricts the Bank from purchasing government securities in the primary market. It also holds that the government shall pay all the current debt it owes to the State Bank with no roll-over.The amount owed by the Railway Department shall be converted into a long-term debt for 8 years to be charged market interest rates.
Right now social media is rife with questions on whether the amendment will create any accountability and we must understand that there are two sources of accountability that exist within the framework. One is the appointment system which creates a tenure for the governor and,if the monetary policy is a failure, then the federal government can appoint another governor after the completion of term or remove them in accordance with the procedure in section 13. Secondly the governor shall present their report to the parliament on their policy and answer the questions raised by the parliamentarians. This is admirable since it will help cement the supremacy of the Parliament rather than empowering the executive. These two accountability sections will allow for a balanced autonomous institution to operate.
However, the bill does raise eyebrows as well and most notable is the indemnity clause which protects former, current and future officials from litigation. And while the courts have repeatedly held that indemnity clauses cannot protect against gross negligence, the addition of this will surely have the state impede legal accountability. This must be amended as soon as possible.
Second is that accountability within the parliament is vague and open for abuse since many highlight that there is no strict requirement that the State Bank will have to work along the targets set by the National Economic Council and this is mentioned nowhere in the bill – creating no legal restriction. Thus legally the State Bank can ignore the government-set targets and not be held accountable for it, since there exist no safeguards nor procedure as to what will happen in the event of the contrary.
Despite the above, the bill is a breath of fresh air where we can have an autonomous Central Bank and the country can have a stable economy free from political interference. And while absolute freedom from the political class is neither possible nor desirable, yet this massive autonomy can have a positive impact on the economy of the country. Many economists have again and again highlighted that the political class can be selfish and often take steps in their tunnel vision for an upcoming election. This has been witnessed repeatedly all across the world and we all must back the state whenever it takes positive steps rather than call it an international conspiracy. We have witnessed 70 years of central control. It’s time we come to the conclusion that the current framework is simply not good enough and give autonomy a chance.
The first thing that must be understood is that there is a world of difference between ‘Independence’ and ‘Autonomy’. The said act proposes to give the State Bank more autonomy but it does not propose for it to be an independent organization. The layout within the framework is similar to the layout present in most countries. State Bank autonomy is a positive step towards the right direction – and the people of Pakistan need to comprehend the fact that an autonomous Central Bank is the requirement of a modern economy.
One of the most often mentioned positives of having an autonomous Central Bank is the reduction in inflation. And this is seen in nearly every country where autonomous Central Banks have led to reduced inflation and controlled Central Banks have led to high inflation. Most economists argue that a controlled Central Bank has a negative impact on the economy due to the constant political interference since politician often give preference to short-term goals at the expense of long-term gains for the sole purpose of re-election.
We see this with the flawed economic policy of controlled pricing of the Dollar rate during the government of 2013-2018, by burning through central reserves – causing economic mismanagement and forcing Pakistan to take loans for debt servicing. Another political interference found is on interest rates. Governments interfere in interest rates commonly to reduce unemployment. In the simplest of terms, a lower interest rate leads to more borrowing by businesses, which causes increased investment or work hire capacity leading to lower unemployment – and while this sounds great on paper, in practice it has a negative impact on the economy. Increased borrowings at lower interest rates lead to low interest returns for the banks. This also reduces the purchasing power of the country and creates lower savings rate since most people find no incentive in savings – leading to lower internal investments in the long run for the country. Lower interest rates are often used to influence growth but when political parties interfere, their focus is to provide an answer to the promises they made. So a lower interest rate causes inflation and in economies where there is stagflation, we witness rising unemployment and rising inflation. This constant interference by the government wreaks havoc on the economy. And it is due to this interference by governments for decades that the IMF predicted in 2020 that Pakistan could be headed for stagflation with an inflation rate of over 10% and a growth of 1%.
The Act contains several sections which can allow for greater economy - and we can see this where, for instance, the governor will be appointed by the President for a period of 5 years. This is extremely important since government meddling made the post extremely unreliable. Post Musharraf, Pakistan has had 6 governors during the period from 2009-2020, where most barely held the post for 1.5 years and the longest was Ashraf Mehmood Wathra who held for 3 years. This made it impossible for any governor to bring any monetary reforms or new ideas and if anybody did bring anything new to the table, they would immediately find themselves removed.
The posts of deputy governor and non-executive directors shall be appointed by the federal government but the act places a bar that no Member of Parliament or political party shall be accommodated to these positions. This will make sure that there is little political interference in the state bank. The governor can be given an appropriate and due term to bring forth a forward-looking economic policy and the removal of the governor can only happen under the conditions mentioned in section 13 – allowing for a more stable State Bank policy to be formulated and implemented.
Extremely important to notice are the changes in the Preamble which amended the previous responsibility of regulating the monetary and credit system and fostering growth, replacing it with the lone and primary objective of price stability. And they will have the absolute freedom to determine and implement monetary policy and formulate the exchange rate policy. The bill includes other objectives such as encouraging development along with utilization of resources available to the country. This will allow for the State Bank to operate in an independent and proper manner, allowing for a more stable economy.
Autonomy is useless if the power of the legislator remains to amend the Act again and place controlling frameworks on the Bank. To address this, the bill includes Section 46B sub-section 8 which bars parliament from passing any legislation that relates to the Bank without prior consultation. This will secure the amendment and the autonomy thus provided for the Bank.
A major reason for the political interference within the State Bank are the borrowings that a state takes from the Bank itself. And to make sure the government is able to capitalize the most on this, the ruling party interferes, asking for reduced interest rates and then borrowing a lot of capital towards short-term development. This creates internal debt and weakens the economy considerably. Many states keep a controlled Central Bank so that they can borrow anything, anytime at any rate – whereas more independent Banks have the power to refuse the government any borrowings. This has been witnessed in the US, Turkey and India in recent times. Pakistan has looked to implement such a restriction so that the government cannot impede the working of the State Bank. And for this the new amendment looks to bar the government from borrowing loans and even restricts the Bank from purchasing government securities in the primary market. It also holds that the government shall pay all the current debt it owes to the State Bank with no roll-over.The amount owed by the Railway Department shall be converted into a long-term debt for 8 years to be charged market interest rates.
Right now social media is rife with questions on whether the amendment will create any accountability and we must understand that there are two sources of accountability that exist within the framework. One is the appointment system which creates a tenure for the governor and,if the monetary policy is a failure, then the federal government can appoint another governor after the completion of term or remove them in accordance with the procedure in section 13. Secondly the governor shall present their report to the parliament on their policy and answer the questions raised by the parliamentarians. This is admirable since it will help cement the supremacy of the Parliament rather than empowering the executive. These two accountability sections will allow for a balanced autonomous institution to operate.
However, the bill does raise eyebrows as well and most notable is the indemnity clause which protects former, current and future officials from litigation. And while the courts have repeatedly held that indemnity clauses cannot protect against gross negligence, the addition of this will surely have the state impede legal accountability. This must be amended as soon as possible.
Second is that accountability within the parliament is vague and open for abuse since many highlight that there is no strict requirement that the State Bank will have to work along the targets set by the National Economic Council and this is mentioned nowhere in the bill – creating no legal restriction. Thus legally the State Bank can ignore the government-set targets and not be held accountable for it, since there exist no safeguards nor procedure as to what will happen in the event of the contrary.
Despite the above, the bill is a breath of fresh air where we can have an autonomous Central Bank and the country can have a stable economy free from political interference. And while absolute freedom from the political class is neither possible nor desirable, yet this massive autonomy can have a positive impact on the economy of the country. Many economists have again and again highlighted that the political class can be selfish and often take steps in their tunnel vision for an upcoming election. This has been witnessed repeatedly all across the world and we all must back the state whenever it takes positive steps rather than call it an international conspiracy. We have witnessed 70 years of central control. It’s time we come to the conclusion that the current framework is simply not good enough and give autonomy a chance.