The federal cabinet has approved a revised draft of the State Bank of Pakistan (SBP) Amendment Bill 2021, which promises complete autonomy for the central bank and places a complete restriction on the government's borrowing from the SBP.

The development was confirmed by Information and Broadcasting Minister Fawad Chaudhry during a press briefing following a cabinet meeting in Islamabad on Tuesday.

The proposed law, which has been heavily criticised by opposition parties including the PML-N and the PPP and which gives unprecedented autonomy to the SBP to target inflation rather than economic growth, is one of the requirements Pakistan has to meet under the programme agreed with the International Monetary Fund (IMF) in July 2019.

Under the programme, the Fund had approved a 39-month $6bn arrangement for the country under its Extended Fund Facility (EFF) to support Islamabad’s economic reform programme.

The legislation will pave the way for the disbursement of a $1bn tranche under the EFF, which has been stalled since April.

In November, Pakistan and the IMF had reached a staff-level agreement to revive the $6b funding programme. The agreement is subject to approval by the Fund's Executive Board, following the implementation of five prior actions, notably on fiscal and institutional reforms.

Thus, the legislation for making the SBP autonomous is one of the prior actions agreed with the IMF. It will potentially be tabled in the National Assembly tomorrow (Wednesday).

Under the draft bill, as approved by the cabinet, domestic price stability has been defined as the SBP's primary objective and supporting economic policies as its tertiary objective. It explains price stability as “the maintenance of low and stable inflation guided by the government’s medium-term inflation target”.

Moreover, the bill's statement of objects and reasons states that the amendments proposed in the draft are in line with international best practices and take into account the ground realities in Pakistan.

“By facilitating domestic economic stability, the amendments will help support sustainable growth and avoid repeated booms and busts that have characterised Pakistan’s past and led to painful consequences in terms of higher inflation, higher poverty and lower growth,” it says.

The SBP Board

It has been proposed in the bill that the finance ministry secretary be retained on the SBP's board of governors but be deprived of the right to vote. Similarly, deputy governors shall have the right to attend board meetings but not the right to vote, the bill says.

The SBP governor shall be the chairperson of the board, it says, adding that in his absence, the board shall be chaired by the deputy governor in charge of the relevant board meeting agenda items.The deputy governor will have the right to cast the decisive vote when he presides over the board in the governor's absence, it says.

It further states that the SBP governor and the finance minister shall establish a close liaison through a mutual agreement and keep each other fully informed on all matters relevant to both, the central bank and the ministry.

Similarly, the SBP shall be consulted prior to the introduction of any bill by the federal government in parliament which may have a bearing on functions of the central bank.

SBP appointments

The bill also lays down the criteria and procedure for the appointment of the SBP governor and the bank's non-executive directors.

They shall be appointed by the president of Pakistan on the federal government's recommendation after taking into account the eligibility and disqualification criteria laid down in this Act, the bill says.

It adds that SBP deputy governors shall be appointed by the federal government after consultations between the finance minister and the SBP governor. They shall be appointed from a panel of three candidates recommended by the governor for each vacant position in order of merit.

Similarly, external members of the MPC shall be appointed by the federal government on recommendations by the SBP board.

The bill proposes that the governor, deputy governors, non-executive directors and MPC members shall be appointed for a period of five years and be eligible for one re-appointment for another term of five years after the end of their initial tenure.

The federal government may remove the governor or a deputy governor if they are guilty of gross misconduct or incapable of properly performing the duties of their offices by reason of physical or mental incapacity, the bill says.

Prohibition on govt's borrowing

The bill states that the government should be barred from borrowing from the SBP.

“The Bank (the SBP) shall not extend any direct credits to or guarantee any obligation of the government, or government-owned entity or any other public entity," the bill reads. The government may, however, raise loans from other commercial banks.

“In terms of financial impact, the government is currently borrowing at market rate and it will continue to borrow at the market rate even after the amendments,” it further states.

The bill says that the central bank, too, shall not purchase government securities — debt instruments that a government sells to fund its daily operations and special infrastructure and military projects — in the primary market, where securities are first created and issued.

However, it adds, the SBP may purchase government securities in the secondary market, where these instruments are traded among investors.

The bill says the government should pay off the debt it owes to the central bank in line with the already agreed schedules and no rollover be allowed.

It explains that this amendment, in particular, is aimed at bringing fiscal discipline.

No immunity from accountability

In the revised draft, the clause providing immunity to the SBP governor, deputy governors, directors of the board, including sitting directors and those who have retired or completed their terms in office, from accountability watchdogs, the National Accountability Bureau and Federal Investigation Agency, has been removed.

The earlier version of the bill gave blanket immunity to all bank officials from courts and accountability watchdogs.