KARACHI: Pakistan is ready to give its central bank freedom from government influence to implement the structural reforms agreed with the IMF under a $ 6 billion rescue package that will send a good signal to international markets, experts say.
They added that it would also help create opportunities to deepen local debt capital markets, reducing the need to rely on the central bank to finance the budget deficit.
Cabinet on Tuesday approved amendments to the law allowing the State Bank of Pakistan to operate without government control. The amendments to the SBP 2021 Law are expected to be approved by parliament as soon as the approval of this law is intended to meet the requirements for the completion of the sixth review of the Fund Extension Fund Facility.
Experts say granting more autonomy to SBPs will increase foreign investors’ confidence in the country’s economy. They must be influenced by the ability of the central bank to be considered an independent institution, but also pose some challenges for the government and the central bank as well.
The government is needed to develop a weak capital market in Pakistan in an effort to diversify sources of funding and cover the budget deficit, said Dr Salman Shah, a former finance minister, referring to the independence of the central bank.
“The government must improve its finances and reduce borrowing costs to narrow the budget deficit. Cut [the government] must take steps to deepen the capital market. This will help reduce the burden of deficit financing on banks, “said Shah.
“Large government loans from the banking system push credit out to the private sector. SBP also needs to increase its capacity to handle the problem itself. “Dr Shah said the market-based exchange rate regime, positive real interest rates, and no loans from the central bank, being the main features of the economic reforms supported by the IMF, have been implemented.
The current IMF loan program, the 22nd, which Pakistan entered into in 2019, was on hold for more than a year.
Experts are concerned about the implementation of the provisions of the Amendments to the SBP Law, 2021 when the current program ends. The law is good, but it becomes meaningless without the enforcement of the law.
Dr Muhammad Yaqub, the former governor of the SBP said in Pakistan a change of law means nothing if the government breaks it at will and the head of the institution is submissive and weak. “There are fiscal laws that limit government debt that is violated left and right,” added Yaqub.
“Look at the amendments made in the SBP 1997 Law and glimpse of Article 9A which was originally approved by the parliament at that time. This was also done because the IMF wanted it as a condition for the loan, “he said.
“This gives more power to the SBP to refuse the government to borrow from him and to undertake an independent monetary policy. Its provisions were never respected by any government after 1999 and were later withdrawn or abolished. Likewise the fate of the current provisions regarding government loans and autonomous monetary policy once the IMF’s grip is gone, “said Yaqub.
“The government must believe in itself that the national interest is best served by giving up its authority to use the printing of banknotes as a source of budget financing … and not doing so to meet the conditions imposed by the IMF … to become part of the basic reality. “
He said the proposed amendments set out the central bank’s main goal of targeting inflation, rather than maintaining growth. “How inflation targeting works in Pakistan stems from supply-side constraints. In developed countries, the increase in inflation is caused more by excessive demand. However, in our country, the government itself creates inflation by raising prices regulated by the government such as electricity and gas prices, ”said Dr Ashfaque Hasan Khan, a former finance ministry advisor and a well-known economist.
The proposed draft says the SBP will take decisions on monetary and exchange rate policy independently and environmentally without intervention from a government whose policies are always subject to political control.
The law will remove the central bank’s monetary and fiscal policy coordinating board, and central bank governors will report to parliament. The government will not borrow in the form of loans and guarantees from SBP.
The proposed draft gives central bank governors a five-year term to ensure policy continuity.
It is yet to be seen whether the SBP transformed itself into a modern, Western-style institution after gaining more autonomy. But the fact that they are doing a decent job of keeping the economy afloat in the coronavirus crisis.
SBP’s move to support the economy during COVID-19 injected around 4.8 percent of gross domestic product in business and household cash flows.