For a state enterprise the State Bank is unusually well run. It has done a decent job of performing its core functions and is known to have a competent team. There might have been occasional errors of judgement but it is generally well respected for its propriety. To the extent its role permits, it conducts its operations in a transparent manner. But are there signs of SBP stretching itself out too thinly? Is it taking on functions that go beyond the mandate of a Central Bank?
Bared to the bones, SBP’s primary responsibilities consist of monetary policy and financial stability. But we see disturbing indications of an enlarged SBP footprint moving away from the core to the periphery. Recent additions to its charter have been Pakistan Remittances Initiative, Financial Monitoring Unit, Deposit Protection Company, the Security Printing Press, and quite possibly the EXIM Bank.
Arguably, some of these can be deemed to be necessary ‘enablers’ to help SBP deliver on its main responsibilities. But it will be hard to justify creation of a subsidiary company to deal with Deposit Insurance and acquisition (at a prohibitive cost) of the Security Printing Press. The former poses conflict of interest hazards and the latter a departure from its mandate, unless it was meant to be a thinly veiled ‘transfer pricing’.
Additionally, and in a clear violation of the Act, SBP is also a shareholder in the National Bank, mixing its ownership interests with its regulatory function. SBP’s only logical and legitimate subsidiary is the Banking Services Corporation (BSC). It was a visionary move on the part of Governor Ishrat Husain to separate core functions from the routine ones like ‘receipt, supply and exchange of Bank notes and coins’ and prize bonds and other National Savings instruments. The idea was to focus on the ‘nerve centre’, and create space to develop and nurture the competencies required for the critical areas of monetary policy, foreign exchange reserves and exchange policy, banking policy and regulation, and research.
Sadly, the message was lost on the more recent Governors who tended to treat BSC not as a stand-alone subsidiary but one other department of the Bank. Worse, BSC became the purgatory, if not the ‘dumping ground’: you fall on the wrong side of the Governor and you end up in BSC till the atonement of your sins. SBP is also struggling to determine if it has a ‘developmental’ role; and if so, does it have the tools. It has created a development wing, but now that ‘directed credit’ (that allowed SBP to direct the banks to lend certain amounts to specified sectors) is out it can at best use ‘moral suasion’ in the form of assigned targets for SMEs, agriculture, housing, etc.
At least a part of the problem is the SBP Act. Enacted in 1956, it has been rendered dysfunctional by a flurry (20 plus) of amendments that looked at parts and not the whole, creating an inconsistent jumble of legal provisions. What we now have is a disjointed document, merrily interpreted by successive governors to suit their personal proclivities. At the heart of the mandate debate is whether or not the Act assigns to the Bank multiple roles; roles that go beyond financial stability and monetary policy (which also subsumes the rupee parity question).
The Act is less than unambiguous. It provides “for the constitution of a State Bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources”. The protagonists latch on to ‘foster Pakistan’s growth’ as the operative part. The antagonists look upon growth as an outcome of prudent monetary and credit policies; not as a specific goal assigned to the SBP.
The antagonists also take heart from Article 9A of the Act that specifies the functions and responsibilities of the Board, requiring the Board to “formulate and monitor monetary and credit policy and, “in determining the expansion of liquidity take into account the Federal Government’s targets for growth and inflation”. Antagonists interpret this to mean that growth is not a SPB responsibility; it merely has to ensure that expansion of liquidity is consistent with GoP targets. Besides, they assert, growth is a function of a lot more than liquidity or even monetary and credit policies, particularly given the time-lag factor. It is not the importance of the responsibilities assumed by SBP – from printing notes to selling deposit insurance to SME development – that is under question. In question are SBP’s locus standi and its comparative advantage. This ‘mandate creep’ runs the risks of a potential conflict of interest on the one hand and likely erosion of focus (away from prime responsibilities) on the other. SBP has a good HR base but why fritter it away by employing it on functions that it is un-trained for? It is its regulatory tools and enormous influence that SBP should leverage to promote ‘development’ – whether exports or agriculture or housing – rather than ‘hands-on’ management.
Businesses and investors look to SBP for clues and guidance in such crucial matters as interest and exchange rates, which constitute Bank’s prime functions. Absence of any kind of ‘forward guidance’ leads to speculations that have a snowballing effect. The market, for instance, knows SBP is resolutely defending the rupee but is not certain if that is sustainable. It fears diminishing reserves will adversely affect government’s ability to borrow at competitive rates, and therefore the inevitability of IMF, with its prior condition of a sharp devaluation. The spectacular jump in FE 25 deposits, just as SBP’s liquid reserves are dwindling, (along with slow down of remittances and export proceeds) sends a powerful message of how the market is bracing itself.
What can the SBP do to douse the speculative fire? How will the interest rates pan out? To what extent will the external sector impact rates, even in a benign inflation environment? Will the next Monetary Policy Statement be more equivocal and provide some ‘forward guidance’? Meanwhile, let’s welcome the new Governor and wish him luck. He comes with excellent credentials and is known to be a solid leader. Hopefully, he will steer the ship clear of uncharted waters.
[We are grateful to a former Deputy Governor for his useful inputs]