The tabling of the State Bank of Pakistan (SBP)Amendment Bill 2021 in the parliament has brought to the fore the main disagreement between the International Monetary Fund (IMF) and the Pakistan government. It’s all about permitting the State Bank of Pakistan to pursue inflation targeting.

Central banks that make inflation targeting the anchor of their monetary policy don’t have to bother about economic growth. The aforementioned bill proposed exactly that. Section 4B of the bill is about the objectives of the central bank. Sub-section 1 of this section maintains that “the primary objective of the Bank shall be to achieve and maintain price stability.” Sub-section 2 says: “Without prejudice to the Bank’s primary objective, the Bank shall contribute to the stability of the financial system of Pakistan.” And, sub-Section 3 says: “Subject to sub-Sections (1) and (2), the Bank shall support the Government’s general economic policies with a view to contributing to fostering the development and fuller utilization of Pakistan’s productive resources.”

In simpler words, if the parliament adopts the proposed bill as an act, the SBP will be free to focus exclusively on “price stability”. This means it won’t necessarily have to ensure the stability of the financial system of Pakistan if that comes into the prejudice of its main objective. And, it will also not have to contribute to fostering the development and fuller utilisation of Pakistan’s productive resources. This is exactly inflation targeting.

The bill proposes changes that will leave no room for the government of the day to ask the central bank to intervene or not to intervene in the foreign exchange market

The promises and perils of inflation targeting are many — and its success or failure in achieving price stability in Pakistan depends upon various “ifs” and “buts”. But one of the prerequisites of inflation targeting is a level of independence of the central bank in the formulation and execution of monetary policy.

The bill seeks to achieve that very independence by amending the very objectives of the SBP. The IMF is pressing Pakistan to get the SBP Amendment Bill 2021 passed from the parliament. And, it has even made it a precondition for the release of the next tranche of its $6 billion lending programme. But chances for the approval of the bill from both houses of the parliament in its present form are slim.

Not only the opposition parties but many from within the PTI-ruling coalition fear that the adoption of the bill would mean compromising Pakistan’s sovereignty.

If the proposed bill is passed into law the SBP will not have to bother about ensuring price stability, ensuring the stability of the financial system and assisting the government in achieving economic and development goals — all at the same time. As explained earlier, ensuring price stability will have primacy over everything else. The central bank would still be charging its other obligations only if in so doing its chief aim of ensuring price stability is not hurt. That would deprive the government of the legal cover for insisting upon the central bank to be supportive of economic growth and development.

If the parliament adopts the proposed bill as an act, the SBP will be free to focus exclusively on “price stability”.

In an extreme eventuality, the government would also not be able to require the central bank to ensure the stability of the financial system. In case the proposed bill is adopted as law, all the central bank would be legally required to do is to contribute to the stability of the financial system and that, too, without prejudice to its main objective ie achieving and maintaining price stability.

The SBP Amendment Bill 2021 also seeks to abolish the Fiscal and Monetary policies Coordination Board — an advisory body created in the Ministry of Finance during the Musharaff era.

The board was supposed to ensure that the fiscal and monetary authorities do not act in ways that hamper the achievement of the macroeconomic goals of the country. But the post-Musharraf democratic government, particularly that of PML N, rather misused it for dictating the central bank. One most notorious example of this attitude is that the then Finance Minister Ishaq Dar kept the rupee overvalued and changed the SBP’s then acting governor when he let the rupee fall in the interbank market without Mr Dar’s approval.

The most audacious of all the amendments that the bill proposes is written down in sub-section C of Section 9. It states: “The Bank shall not extend any direct credits to or guarantee any obligations of the government or any government-owned entity or any other public entity.” This is just unacceptable to the government — as well as for Pakistan’s powerful establishment. If this sub-Section of the proposed law becomes law, running its day to day affairs will become too difficult for the government — and pursuing geostrategic goals through economic diplomacy will become too difficult for the establishment.

But the IMF and the SBP both love this proposed change in the SBP law and don’t want the parliamentarians to drop it while approving SBP Amendment Bill 2021. One win-win solution could be to link government borrowing from the central bank to the parliament’s approval. That will open a window for the government’s direct borrowing from SBP only under “special circumstances” — and that, too, after seeking the parliament’s approval for that.

The bill also proposes changes that will leave no room for the government of the day to ask the central bank to intervene or not to intervene in the foreign exchange market. Just like the proposed discontinuation of the government’s borrowing from the SBP, this proposal also can be approved with some “ifs” and “buts”. Because, whereas the government’s intervention in the forex market is not desirable, a window must be kept open — if not for the government of the day, certainly for the parliament— to make a final call on the management of the external economy in critical times.

After all, it’s the state of Pakistan — and not the State Bank of Pakistan —on whose shoulders lie the ultimate responsibility of safeguarding the overall interests of Pakistan under all circumstances.

Published in Dawn, The Business and Finance Weekly, January 10th, 2022