The Limits of Autonomy

The Limits of Autonomy

In the economic front, the incumbent coalition government of Pakistan Tehreek-i-Insaf (PTI) believes that all its failures are due to the current structure of the State Bank of Pakistan (SBP). The PTI government’s view is that SBP’s role as an autonomous institution would help them lower the inflation rate, which will ultimately lead to financial stability. Therefore, the PTI Government prepared the State Bank of Pakistan Amendment Bill 2021 (“the Bill”) — its text has not been made public till today and only objectives are provided at the Ministry of Finance (MoF) website. It is a blatant violation of Article 19A of the Constitution of Pakistan. It is unprecedented in any democratic dispensation.

The Bill intends to further amend the Act of 1956. Objectives mentioned by the Ministry of Finance (MoF) are:

•    to make it an autonomous body;

•    to achieve the objectives of domestic price stability, financial stability; and

•    support for the government’s economic policies to foster development and fuller utilisation of resources.

Apart from the above, the proposed amendments extend absolute immunity to the SBP’s Board Members, Deputy Governor, members of any board committee, and monetary policy, officers, and employees of the central bank. The Bill further provides them immunity from being personally liable for any decision made in good faith and in case of proceedings initiated, they would be compensated by the bank accordingly. Despite these privileges, what if the SBP fails to achieve the assigned objectives? Since 2018, the SBP is operating almost independently and pursuing policies that are not aligned with public interests.

Similarly, the MoF has failed to achieve its basic goal of providing better living standards by generating economic activity in the country. Moreover, neither higher taxes could be collected nor could the government promote an efficient tax collection system. The PTI government lacks any strategy to counter rising unemployment. Rather, both MoF and SBP are operating under IMF’s directions. They have failed to generate enough revenues, forcing Pakistan to follow lenders’ policies.

In the existing circumstances, SBP may be given autonomy but ultimately it will remain subservient to the IMF. Mr. David Lipton, First Deputy Managing Director and Acting Chair demanded this in the Press release of IMF 19/264 in July-2019 stating: “A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan’s (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability.”

Similarly, the SBP Governor updated IMF through his letter of intent in March 2021 confirming submission of the amendments to the Parliament. It is interesting to note that this idea of “autonomy” did not come from the Legislature but rather as a commitment to the IMF.  The impact of these foreign-directed policies might get us a few dollars as short-term relief but in reality, these actions will compromise our national security. Our weak economic policies have brought us to a position where the lenders’ focus is on discussing sensitive bank accounts maintained by military and intelligence agencies. This is alarming, as security institutions operate in their own way. Being responsible for maintaining national security, use of their funds is strictly confidential and monitoring their security-related accounts might pose a direct threat to national security.

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SBP Governor Reza Baqir: Immune
to accountability?

The revival of IMF’s suspended $6 billion Extended Fund Facility (EFF), according to Adviser to the Prime Minister on Finance & Revenue, Mr. Shaukat Tarin, is on the cards. In a statement, he said: “a constitutional amendment would be required to pave the way for the approval of the State Bank of Pakistan (SBP) Amendment Bill, 2021 in its present form but the government lacked the two-thirds majority in parliament.” Approval of the Bill, he further said, “was the condition that was hampering a deal between Pakistan and the International Monetary Fund (IMF) for a $1 billion loan tranche.”

According to another press report of November 11,2021: “The second round of dialogue between Law Minister Dr. Farogh Naseem and International Monetary Fund mission chief for Pakistan Ernesto Ramirez Rigo for the revival of its $6 billion Extended Fund Facility (EFF) ended inconclusively, as both sides could not agree on a new consensus draft.”

This confirms that revival of IMF’s EFF and release of the much-awaited tranche will take some more time after failure of the dialogue. It is pertinent to mention that in a letter of intent to the IMF chief in 2019, Pakistan assured the IMF chief of making legislative changes in order to give SBP autonomy over its operations. Now it has become a precondition for releasing the tranche.

In its Review [PR 21/83], IMF asked Pakistan regarding the implementation of the conditions agreed, including the autonomy of SBP. The PTI government is now hesitant to implement the reforms agenda agreed with the lender of the last resort. On the issue of amending the SBP Act, 1956, the government has purportedly told the IMF representatives that most of the provisions of the Bill are ultra vires of the Constitution of Pakistan as well as the Companies Act 2017. Reportedly, on this issue, the IMF representative asked the official to share the ultra vires provisions. It has also been reported that the PTI government wants to retain the right to set policy direction as well as assign inflationary targets to SBP. The government also wants to keep the option of borrowing from SBP. It is widely reported in the media that this time, the IMF representatives are not agreeing on relaxing these conditions for reasons more related to geo-political considerations rather than on purely technical emulation, though in many areas improvements have been shown by the government.

IMF and Pakistan’s disagreement regarding implementation of the reform agenda is not new. It has been observed that Pakistan has initially agreed on the terms of the programme apparently to avail financing. However, later on, it failed to implement the agreement and finally terminated the programme in the middle. Therefore, despite approaching the IMF 22 times since 1952 in order to obtain financing facilities, it has managed to complete only a single programme. All other programmes ended without completion due to various reasons, but mainly due to not implementing the agreed economic reform agenda.

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Advisor to the Prime Minister on Finance Shaukat Tarin claims the inability to get the SBP amendment bill through parliament is stalling further IMF support.

Similarly, before opting for the current IMF programme, Prime Minister, Imran Khan, was a strong opponent of IMF’s bailout. In his political sloganeering, he even said that he would prefer to commit suicide rather than approach the IMF. The PTI government was confused about selection of forums to avail financing to come out of the financial woes it had inherited and run the state’s affairs smoothly. Firstly, it introduced a mini-budget in September 2018 and imposed taxes of approximately Rs. 730 billion. Later on, it introduced a new strategy of improving foreign reserves by going from one country to another with a begging bowl and requesting them to deposit money with SBP to artificially build foreign reserves. Brotherly countries like Saudi Arabia, United Arab Emirates, and China initially contributed to meet this requirement of Pakistan.

In 2019, the Government realised that without opting for the IMF programme, it was impossible to meet requisite financial needs. Therefore, for the first time in history, Pakistan’s Prime Minister personally travelled to United Arab Emirates to meet the IMF chief and assured her about Pakistan’s desire to opt for IMF support and implementation of its reform plan. Subsequently, on June 19, 2019, a formal request was made to the IMF, through a Letter of Intent, jointly signed by Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, and Reza Baqir, Governor State Bank of Pakistan, expressing the will for opting for a 39-months extended arrangements under the IMF’s EFF for the amount of $6 billion. In the same request, Pakistan attached a Memorandum of Economic and Financial Policies, which contained assurance of restructuring of fiscal policies, monetary and exchange policies, energy sector policies, structural policies, etc.

On the agenda of restructuring of fiscal policy, the Government assured the IMF chief that it would take steps to eliminate tax concessions and exemptions, including zero-rated products, increase excise duty on cigarettes including implementation of new duties, reduce the personal income tax threshold as well as increase the rates, enhance sales tax on petroleum products plus withdrawal of subsidies offered in the past. On the monetary and exchange policy fronts, both the Advisor to the Prime Minister on Finance and Governor SBP assured the IMF chief that Pakistan would maintain a flexible market-determined exchange rate, strengthen State Bank monetary policy and operational framework.

It was promised that Pakistan would net off SBP borrowing over the period, and make amendments in the State Bank Act, 1956 to ensure full operational independence in pursuit of price stability, lengthening of governor’s tenure, and delinking it from the electoral cycle. The IMF was also assured of enhancing financial autonomy and accountability by strengthening the profit distribution rules and specifying recapitalisation requirements, including any form of direct credit to the government. Furthermore structural reforms would be undertaken in the energy sector and the government would increase the gas tariff to stop the growth of quasi-fiscal deficits as well as initiate the privatisation of state-owned entities incurring losses of billions every year.

The PTI has been failing to implement a self-planned and agreed economic reforms agenda, despite giving assurances many times. Pakistan is committed to increase tax revenue by 4 to 5 percent of GDP. After three years and removal of various exemptions and concessions, including imposition of new taxes, Pakistan’s tax to GDP ratio could not reach the level conveyed to the IMF. We had even committed to carrying on a firm downward trajectory the overall deficit in compliance with the Fiscal Responsibility and Debt Limitation Act (FRDLA) but, as reported in the media, the government has accepted in its report presented in the National Assembly that it had breached almost all targets envisaged under the FRDLA.

The government only complied with the issuance of new guarantees while it violated the other three targets with huge margins. With regard to structural reforms in monetary and exchange policies, we had ensured full operational independence of the SBP in pursuit of price stability and enhancing its financial autonomy and accountability by strengthening the profit distribution rules and specifying adequate recapitalisation requirements, for which the PTI government introduced the Bill. This Bill defines three objectives for the SBP, as mentioned earlier. However, the Bill for autonomy of the SBP is still unclear.

As per the Bill, the SBP will ensure domestic price stability but the law does not define the meaning of “price stability.”  In the current administrative structure, managing prices is the domain of the federal as well as provincial governments and expecting SBP to work for domestic price stability seems to be a misplacement of the task. Our policymakers need to assess the role of the central bank with respect to food and energy inflation, which is a result of tariffs, duties, taxes, domestic as well as international market prices, and demand and supply challenges.

Another objective is to increase functional and administrative autonomy of SBP. This autonomy will itself restrict the role of government in managing the policy rate and exchange rate. IMF and independent lenders have always advocated for driving the exchange rate through market forces. This can ease pressure on FX reserves, especially when the government starts pumping dollars into market to artificially maintain rupee parity. However, for economies like Pakistan, the regulator and other government institutions have to be cognizant of the fact that there are certain forces in the market that can manipulate the exchange rate and that in such circumstances the central bank cannot simply alienate itself.  Pakistan is an import-based country and even a slight devaluation can have a multiplier effect on the overall import bill. To avoid this vicious cycle, the oversight role is highly necessary.

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Pakistan has failed to meet the tax-to-GDP ratio targets set by the IMF.

The current provisions of SBP Act of 1956 through subsection (1) of section 9C offer borrowing facility from the central bank with a condition that at the end of each quarter, it has to be returned leading to zero net borrowing. The Bill proposes a complete ban on government borrowings, which seems to be a positive move. It remains a fact that the government has been borrowing from the SBP in high volumes, finding an easy way to bridge its deficits while it has reduced the fiscal space for commercial and domestic borrowers. However, the blanket ban would put MoF at the mercy of the commercial banks and high borrowing rates.

One of the most controversial provisions in the Bill is about immunity offered to functionaries of SBP. It suggests that no suit, prosecution or any other legal proceeding shall lie against the Bank, Board of Directors or member thereof, Governor, Deputy Governors, officers and employees of the Bank for any act done in exercise or performance of any functions. Further, the National Accountability Bureau (NAB) and Federal Investigating Agency (FIA) or any provincial investigation agencies etc are completely barred from taking any action, undertaking inquiry, investigation or proceedings without prior consent of the Board of Directors of SBP. This special treatment also extends to former directors, Governors, Deputy Governors. These blanket provisions are in sheer contrast with the spirit of accountability, especially when politicians have been charged with criminal offences merely on a random application from “undisclosed sources.”

All institutions must be held accountable for their decisions and actions. No institution or department should have privileges of immunity or special relaxations. The law must be applied in an equitable way to uphold the spirit of accountability under the Constitution of Pakistan.

The amendments contained in the Bill and released to media are a result of understanding between the government and IMF. For any country having sovereignty over its economic and legislative decisions, this should have been based on internal requirements rather than a forced change imposed by lender. Prima facie, it seems that if the Bill is adopted, the financial interests of IMF will prevail over economic interests of Pakistan. Such autonomy, independence without accountability, would further deepen the ongoing economic disaster, which can ultimately lead to security and sovereignty challenges. We need to lower our reliance on external lenders. The incumbent government and state institutions should work to add value in their governance and administrative performance. We must facilitate our corporations and taxpayers through regulations and policies to boost economic activity. This value generation cycle can help in lighting up multiple economic indicators that are currently dimming.

Dr. Ikram ul haq | Featured, Perspective from Narratives Magazine
Dr. Ikram Ul Haq
The writer is an Advocate of the Supreme Court, and specialises in constitutional, corporate and tax law.
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