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What ails the SBP?

The amendments made to Section 9 of the State Bank of Pakistan (SBP) Act in 1994, 1997 and 2012 have redefined the role and responsibilities of the Central Board of Directors of the SBP and imposed restrictions on government borrowing from the SBP. It is the most important but at the same time the most violated section of the Act.

It may be useful to summarise these provisions and point out its main violations hoping that all concerned will begin to follow the rule of law in practice by abiding by its provisions.

The amended Section 9(1) of the SBP Act states that “the general superintendence and direction of the affairs and business of the Bank shall be entrusted to the Central Board of Directors” consisting of 10 members with the governor as its chairman and secretary, Finance Division, Government of Pakistan as an ex-officio member, and eight other directors who “shall be eminent professionals from the fields of economics, finance, banking and accountancy” to be appointed by the Federal Government.

Earlier there was a clause that made the board decisions subject to the approval of the Federal Government but it was removed through an amendments made in 1994 to give the Board complete autonomy in the performance of its functions. The Board is thus autonomous in conducting all business and affairs of the Bank including most importantly the monetary policy. All Board members, including the secretary Finance, have the same voting right and weight in the Board for decision-making with the governor, as ex-officio chairman of the Board, having a tie-breaking casting vote.

The next section, Section 9A, defines the functions and responsibilities of the Central Board of the SBP specifically relating to the conduct of the monetary policy. The main functions of the Board in this regard, as defined in this section, are:

*To set the target of monetary expansion for each fiscal year that is consistent with the growth and inflation targets agreed with the government in the Monetary and Fiscal Co-ordination Board (MFCB) before the announcement of the budget.

* To determine “the limit of credit to be extended by the Bank to the Federal Government, provincial governments and other agencies of the federal and provincial governments for all purposes” within the target of monetary expansion.

*To work out the credit requirements of the private sector that are consistent with the investment and growth targets and to use them for regulation of credit to the private sector.

*To take steps to ensure the enforcement of the limits as determined above

*To co-ordinate the monetary policy so determined with the fiscal and exchange rate policies through regular quarterly meetings of the MFCB and

*To submit a quarterly report to the parliament on the state of the economy, with a particular reference to monetary developments

The next section, Section 9 B, defines the composition and the functions of the MFPCB that has a co-ordinating role in macroeconomic policy formulation, but with a specific provision that “in carrying out its assigned functions of co-ordinating fiscal, monetary and exchange rate policies and for ensuring consistency among macroeconomics targets of growth, inflation——the Co-ordination Board shall not take any measure that would adversely affect the autonomy of the State Bank of Pakistan.”

Finally, Section 9(C) states that “notwithstanding anything contained in sections 9(A) and 9(B), the federal government borrowing from the Bank shall be such that at the end of each quarter they shall be brought to zero barring the ways and means limit that shall be determined by the Central Board from time to time”, and the outstanding borrowing of the Federal Government from the Bank as on 30th April 2011 shall be retired not later than eight years from that date. Moreover, if these provisions were violated by the executive branch, the Finance Minister will provide a detailed justification for the said failure to the parliament.

Furthermore, section 46-B of the SBP Act explicitly prohibits the government and quasi-government agencies from issuing any instructions whatsoever to banking institutions that are in conflict with the SBP policies and directives, and also mandates the staff, management and board of the SBP not to “take instructions from any person or entity including the government” in the performance of their functions, and emphasises that the autonomy of the Bank shall be respected at all times and by all parties.

This is a comprehensive legislation passed by the Parliament to legally define the procedural and institutional arrangements for the formulation and implementation of the monetary policy.

But currently, these provisions of the SBP Act are being violated with impunity by both the government and the SBP. These violations are summarised as follows:

(a) The Federal Government has failed to appoint all the board members as required by the law and at present the Board consists of the governor, the finance secretary and one appointed member who perhaps does not meet the qualifications/criterion defined above. Thus, legally, the Bank has no board and the conduct of its affairs is unlawful in the absence of a duly constituted full board;

(b) The Board of the SBP, even when it was constituted fully, had abdicated its statutory autonomy and the government was allowed to openly interfere in the affairs of the Bank and the banking system in violation of the provisions of section 46(B) of the SBP Act;

(c) The MFPCB does not follow the letter and spirit of the provisions of the law in conducting its business and has stopped performing its functions regularly as defined in the law;

(d) The SBP does not perform its duties to set the safe limit of monetary expansion, the credit requirements of the private sector and residually determine the limits on government borrowing from the Bank based on monetary policy considerations and intimate them to the ministry of finance through the MFPCB;

(e) As the SBP does not perform its first function of determining the limits of monetary expansion and government borrowing from the SBP, it also fails to perform its follow-up function of taking measures to enforce them during the fiscal year;

(f) The SBP has failed to set and enforce the limit on ways and means in relation to advances of the Federal Government as required by the law and has failed to enforce those that it sets for the provincial governments;

(g) The government has failed to meet the provisions of the law to bring down its borrowing from the SBP to zero at the end of each quarter; and

(h) The government has so far failed to bring to the attention of the National Assembly its violation of government borrowing restrictions.

In the larger interest of the country, and to ensure building up of vital national institutions, these violations of the SBP Act need to be stopped. The best course is for the SBP and the governments to voluntarily respect the rule of law and de facto abide by the de jure provisions. In this regard, the initiative has to come from the SBP to ensure adherence to the provisions of the SBP Act under which it operates.

If voluntary compliance with the law is not forthcoming for whatever reason then either the Supreme Court should take suo motu action for the enforcement of the law or any citizen could take the matter to the Supreme Court to protect the fundamental rights of the majority of the population that are being trampled upon by these violations by the government in particular through hidden taxation of the poor via inflation and monetary mismanagement.

(The writer is a former governor of the State Bank of Pakistan)

Dr. Muhammad Yaqub, "What ails the SBP?," Business recorder. 2013-02-11.
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