IMF Quells Pakistan

The International Monetary Fund (IMF) is an international organization. 189 countries are members of the International Monetary Fund. It has its headquarters in Washington, D.C., USA.

Keeping in view the preconditions of the International Monetary Fund (IMF) for releasing future tranches of its $6 billion loan, the cabinet’s recent approval of a draft law to make the State Bank of Pakistan autonomous body ushered an unending debate about how much freedom should the State Bank enjoy. Many have raised fears about its long-term impact not only on the economy but also on the country’s overall sovereignty.

The central bank in a developing economy performs both traditional and non-traditional functions. The principal traditional functions performed by it are the monopoly of note issue, banker to the government, bankers’ bank, lender of the last resort, controller of credit and maintaining stable exchange rate.

Last week Pakistan Muslim League-N (PML-N) Secretary-General Ahsan Iqbal claimed the government was enacting such a law which would hand over the State Bank of Pakistan (SBP) control to the International Monetary Fund (IMF) and other international financial institutions. Moreover, the SBP would not be accountable to the parliament, the prime minister or any institution of the country and it would only be answerable to the international institutions. He said National Accountability Bureau (NAB), FIA or any other institution would not be able to ask the SBP governor and other officials for any corruption. If the prime minister of Pakistan can appear before NAB, then why can’t the SBP governor?” It was only to mortgage Pakistan’s economy with the international institutions.

There has been a jarring debate on the pros and cons of the proposed changes. Those opposing them argue that the changes could free the State Bank from any accountability while giving it too much power. They also contend that the deletion of the reference to “growth” in the preamble of the existing SBP Act will make the SBP focus exclusively on price stabilisation and not give any attention to growth.

There is no doubt that short-term political agendas drive political governments, and monetary policy is best conducted by a central bank that is independent of the elected government. Nevertheless, it would be better to clarify some issues when the legislation is debated by parliament.

The more important ones include how and who would determine the inflation rate. Should the monetary policy focus on headline inflation (as is the current practice) or core inflation ie excluding food and energy (as used to be the case previously)? Should the State Bank only be targeting inflation or its role should be wider to also look at the nominal GDP growth (sum of inflation and real GDP growth).

All in all, autonomy should not be overdramatised as is being done by some critics. It is limited to three things, all of which are consistent with the international best practices – monetary policymaking, no free money to print and not having one individual at the Ministry of Finance determining the exchange rate. Since the governor and deputy governors are appointed by the government, there is no absolute autonomy.

Dr Shaikh said the draft law also provided a five-year guaranteed term to the SBP governor instead of the existing three years and surrendered the government’s right to borrow from the central bank and instead adopt measures to meet its financial requirements through its resources. This caused unrest as in a country like Pakistan the hold of the village moneylender in rural areas can be slackened if new institutional arrangements are made by the central bank in providing short-term, medium-term and long-term credit at lower interest rates to the cultivators. A network of cooperative credit societies with apex banks financed by the central bank can help solve the problem. Similarly, it can help the establishment of lead banks, and through them regional rural banks for providing credit facilities to marginal farmers, landless agricultural workers and other weaker sections. With the vast resources at its command, the central bank can also help in establishing industrial banks and financial corporations to finance large and small industries.

The SBP will not guarantee any loan, advance or investment entered into by the government or its entities. Provided that the existing outstanding debt owed to the SBP in the form of loans, advances or government securities purchased on the primary market, at the time of the enactment of the SBP (Amendment) Act 2021 shall be retired in accordance with the terms and conditions under which such outstanding debts were extended. In compliance with the prohibition of monetary financing under this section, no roll-over or re-profiting of such existing outstanding debt of the governments shall be permitted.

Other significant changes for the autonomy are surrendering the government’s right to borrow from the central bank to keep a check on deficit financing done through printing new money, extending the tenure of the SBP governor from three to five years (renewable for another term) to minimise political meddling and also bring it closer to international practice, and providing immunity to State Bank officials for decisions making.

At the same time, the restriction imposed on the government from getting loans from the State Bank may increase reliance on borrowing from commercial banks which would further crowd out borrowings by private investors. Consequently, it will end up in a suffocated budget.

The vicious cycle started with the dramatic entry of Mr Baqir Raza as the second IMF staffer to head the central bank. Before him, Dr Mohammad Yaqub was brought in from the IMF to lead the SBP from 1993 to 1999. His predecessor Tariq Bajwa served as central bank head since 2017 and was suddenly removed.

It can be seen in the light of Gen Hamid Gul’s statement, “no Pak COAS is appointed without the approval of the United States”. Unfortunately, the same can be said about the appointment of the head of the State Bank of Pakistan. This is now an open secret even among mid-level faujis, bureaucrats and a common man in Pakistan that the process of selection of the governor has so far been rather opaque. As a result, only one of the previous five governors could complete even a single term of three years. Also, those who think that the removal of the MNS govt was an entirely internal issue, are mistaken. It had an American nod to prevent Pakistan from giving China access to the sea. Everybody knows we have been a US client state since the birth of Pakistan. No surprise.