Real recipe for success


The National Assembly Committee on Finance has passed amendments in the SBP Act of 1956 for creation of a Monetary Policy Committee (MPC) with powers to fix key discount rates and formulate monetary policy of the country independent of government’s interference.

The spirit of the amendment is to end any kind of political interference in monetary policymaking processes and give real autonomy to the State Bank of Pakistan. This change is sought by the International Monetary Fund (IMF) under its Extended Fund Facility of $6.64 billion to the country in three years. The government had been dragging its feet on the pretext of the Parliament having the final say in the matter.

Creation of an independent MPC was also proposed by the Fund – under its previous programme – to the PPP-led coalition government. The amendment was passed, giving MPC only a recommendatory role; it however vesting the Central Board of Directors of the Central Bank with powers of final approvals. The Fund is of the view that since the Federal Secretary Finance is an ex-officio member SBP’s Central Board of Directors and other members on the board are nominated by the government on the recommendations of the Finance Ministry, the real power lies with the government. Therefore, the government has the final say in fixation of lending rates and PKR parity. Further, despite the law providing SBP the power to control its balance sheet by refusing federal government to honour its cheques and retire the debt it owes to the State Bank as per existing law, thus far, all successive governments have violated this law with impunity. This has resulted in Pakistan repeatedly going to the Fund for help and having a high incidence of inflation and a weak currency.

The real issues facing Pakistan are the perennial twin deficits, ie, both in dollar and rupee terms. In 2005, the Parliament passed the Fiscal Debt Limitation Act. But because our parliamentarians lack the financial skills to hold the federal government accountable, despite repeated reminders provided in SBP’s quarterly reports, the law was continuously violated and no accountability or proper oversight by the Parliament was undertaken.

The law provides fixed tenures to certain functionaries so that they can conduct their assigned role fearlessly. It has not happened because the politicians know how to work around it and there are people available and willing to do their bidding. Therefore, Parliament may pass any law that it pleases to but the objective will only be achieved if the appointees have the spine to resist governments pressure and remain steadfast in achieving the objective. What we have seen so far is that this depends on the linkage between the appointing authority and the appointee. Finance Minister Dar enjoys his powers because of his strong relationship with Prime Minister Mian Nawaz Sharif. The law gives the powers to the PM. The Finance Minister’s relationship with PM needs to be: “When FM says ‘No’ PM needs to understand that this ‘No’ is in his and his government’s best interest and also in the interest of the country”. This is the key to success or failure of a policy in a country like ours.

Similarly, Governor SBP needs to either enjoy the confidence of the real repository of power or can choose to go home. Both SBP governors Syed Salim Raza and Shahid H. Kardar opted to go home before completing their terms in office because of lack of confidence in them was expressed by the then President, Asif Ali Zardari. Their Deputy Governor Yasin Anwar, was elevated by Zardari; he also relinquished his charge prematurely as the new government of PML (N) found him inadequate for the job. Only Dr Ishrat Husain completed his two terms in office as Governor of the Central Bank because Pervez Musharraf not only liked his advice but also found him sound for the job. This just goes to prove that the strength of a relationship between the appointing authority and the appointee prevails in this country and not the SBP Act. This is indeed sad. The notion that a change in the SBP Act would bring about a change in governmental attitude is patently wrong. The existing law gives SBP autonomy and not independence. Autonomy means having financial and administrative powers to act within the system where rule of law and not whims or desires prevail. The Federal Reserve acted to save the financial system in the US. So has the European Central Bank. The Governor of Bank of Japan’s thinking is in line with Prime Minister Shinto Abe’s economic vision. Hard thoughts are needed prior to appointment of the Central Bank Governor and there should not be any second guessing afterwards. Fiscal & Monetary Co-ordination Board is meant for co-ordinating economic policy by both arms of the state under the Chairmanship of the Finance Minister.