The autonomy of the State Bank is a long standing issue of great significance to the national economy. In this connection, one of the basic reforms recommended by IMF and other agencies is the autonomous functioning of the central bank. The proposed reforms include limiting the government borrowings from the central bank and allowing it to set the monetary policy without any interference from the Government. A related requirement is independence in managing the foreign exchange reserves, including interventions in the Forex market to stabilize the exchange rate.
The first attempt to accord autonomy to SBP was made through an Ordinance promulgated in October 1993. The next PPP government after some initial hesitation endorsed the Extended Structural Adjustment Facility (ESAF) program which was negotiated by the Interim Government.
Apart from certain provisions relating to the security of the tenure of the Governor and Board of Directors, the main purpose of the amendments was to limit government credit and, in so doing, to ensure that there was proper coordination with other policies of the Government. Two years back the government passed “The State Bank of Pakistan (Amendment) Bill, 2015” to empower the State Bank of Pakistan with regard to its power to take crucial decisions independently pertaining to interest rates, foreign currency reserves, exchange rate, limit and nature of advances and loans to the government. The law put special emphasis on the statutory role of the Monetary Policy Committee.
The new law paved the way for setting up a statutory monetary policy committee that would take monetary policy decisions independently and without any interference. A statutory monetary policy committee, with external experts to be appointed by the federal government was established, which will be responsible to formulate, support and recommend the monetary policy. A new section on lender of last resort was included in the Bill to provide legal certainty to the support that the SBP provides to the troubled banks. Another new section bestowed wide regulatory powers to the SBP for issuing directives, imposing and recovering penalties which are already being exercised by it under the Banking Companies Ordinance 1962.
It is no secret that although supposedly independent, the State Bank has over the years acted as handmaiden of the powers that be and served the political interests of the incumbent government through its policy measures. Past experience shows that often SBP’s interest rate decisions are not made on purely economic considerations but dictated by the finance ministry. For far too long the government has relied on borrowing to finance even its day-to-day running. Legally empowered, the Bank is now in a position to put its foot down on the matter of banks advancing loans to the government. Experts hope that over time the SBP will become a more vibrant institution and play its due role in safeguarding the best interests of the State and the people independently without interference from the government which is more concerned with securing its partisan ends.