The National Accountability Bureau and the Federal Investigation Agency will have full powers to investigate SBP officials for criminal or corruption-related matters under the proposed State Bank of Pakistan (SBP) Amendment Act 2021, however, indemnity is being proposed for actions taken in good faith, so that officials are not afraid to take actions.

Recently, the proposed SBP Amendment Act 2021 has been presented in parliament for formal approval. To better understand the proposed amendments, the Ministry of Finance (MoF) and the SBP have only jointly prepared a brief document on the proposed Act.

Supporting economic policies of the government to foster development remains one of the three objectives of the State Bank under the proposed amendments, in addition to domestic price stability and financial stability, they maintained.

According to a brief document shared through twitter accounts of the SBP and MoF, it is a misperception that the State Bank will become a “state within a state” without accountability to the government, parliament or any law enforcement agency.

“The State Bank will continue to be a public institution that is owned by the government and works for Pakistan only and to deliver the best outcomes for Pakistani citizens within the mandate given to it by the government. The State Bank will remain accountable for its actions”, it added.

Indeed, accountability is being enhanced. First, by defining its objectives more clearly so that its performance can be better assessed. Second, by requiring that the governor submit an annual report to Parliament on the extent to which these objectives were met and a separate report on financial stability, as well as explicitly giving the right to Parliament to ask for senior officials to appear before it as many times as needed. However, the current Act does not have any such provisions.

“NAB and FIA will have their full jurisdiction to investigate SBP officials for criminal or corruption related matters. However, indemnity is being proposed for actions taken in good faith, so that where due care and due process are followed, officials are not afraid to take actions. This is quite common in central bank laws and is considered an international best practice,” the ministry said.

All officials including the Board of Directors, members of the Monetary Policy Committee, Governor, and Deputy Governors will continue to be appointed by the Federal Government, as is the current practice.

All major policy decisions of the State Bank will continue to be made by the BoD or the MPC. In fact, additional checks and balances on the management of the SBP are being added under the proposed amendments.

First, the oversight powers and mandate of the government appointed BoD is being strengthened.

Second, the process of internal decision-making on all policy matters is being strengthened. Third, financial transparency is being enhanced through the formation of an Audit Committee, the creation of the position of a Chief Internal Auditor, and a comprehensive provision for the appointment of external auditors.

Under the proposed amendments accountability for interest rate and exchange rate decisions will be enhanced due to the need to present before Parliament the extent to which the State Bank was able to meet its mandated objectives.

According to a joint statement, government borrowing from the central bank can lead to inflation and balance of payments difficulties. In Pakistan, recourse to such borrowing has also contributed to lack of fiscal discipline, low revenue generation in the form of one of the lowest tax-to-GDP ratios in the world, repeated booms and busts and the need for repeated IMF assistance.

Government borrows from the central bank simply, resulted in printing money that does not create more real resources in the economy. More money ends up chasing the same number of goods, hence leading to an increase in prices, otherwise known as inflation. Inflation is extremely harmful and acts like an indirect tax on the public, which affects poor people the most.

Restriction on government’s lending from SBP would be beneficial, by leading to lower inflation, greater fiscal discipline, increased efforts to raise the tax-to-GDP ratio, and fewer balance of payments crises in the future.

The SBP and the MoF all external debt is contracted by the government and not the State Bank, and it is the government’s prerogative to decide about repayments. Pakistan has never defaulted on its external debt obligations, and this decision has not compromised domestic development.

It has only served to increase domestic and foreign investor confidence, ensuring the continued supply of investment and foreign capital into the economy, thus helping Pakistan’s development.

This report was first published in Business Recorder on Jan 8, 2022.