The federal cabinet on Tuesday approved sweeping powers for the central bank in a rush to fulfill an International Monetary Fund (IMF) condition, but it neither set an explicit inflation target nor assured accountability.
Price stability will be the main objective of the central bank but this was not defined in the State Bank of Pakistan (SBP) Amendment Bill 2021 which the cabinet approved without fierce discussion on fundamental changes to the SBP Act of 1956.
To meet another IMF condition, the Federal Cabinet approved the State Enterprises (SOE) Bill aimed at revamping the existing management structures of these enterprises.
The SBP’s only mandate would be price controls and it would set monetary policy and exchange rate policy independently, Federal Finance Minister Dr. Abdul Hafeez Shaikh said at a press conference on Tuesday.
The central bank is currently responsible for supporting economic growth and the stability of the monetary and financial system.
“Price stability is not defined in the new law, but you don’t want erratic movement of inflation and it has to be in the single digits,” Finance Secretary Kamran Ali Afzal said when answering a question. whether price stability had been defined in the new law.
Afzal said the National Economic Council would set an inflation target for the SBP. But that was not mentioned in the bill.
Sources told the Express Tribune that there had been no worn-out discussion within the federal cabinet on the SBP bill. They said the finance secretary had informed the cabinet that submitting the bill to parliament was a prior action by the IMF.
The secretary reportedly told the cabinet that if the need arose, changes could be made during the approval process.
“There is no liability clause in the current law, but there is an explicit liability clause in the new bill,” Afzal said.
But article 39 of the new bill does not guarantee liability. It says: “The governor will submit an annual report to parliament regarding the achievement of the bank’s objectives, the conduct of monetary policy, the state of the economy and the financial system. In addition, Parliament may require any senior official to be present at such additional times as may be necessary.
The finance secretary and finance minister dodged the question of why the finance ministry agreed to all the controversial clauses of the SBP law, which it had opposed tooth and nail until recently.
Asked whether the SBP governor would be Pakistan’s fifth governor after the sweeping powers, Information Minister Shibli Faraz said all of these points were “valid and these things will be smoothed out” before the approval of the law.
The finance minister said that the term of the SBP governor would be five years and the government would not borrow or take guarantees from the SBP for its operations. The Minister declared that the Council for the Coordination of Monetary and Fiscal Policies would be abolished.
Economic policy support has been declared a “tertiary objective” of the SBP. The National Accountability Bureau (NAB) and the Federal Investigation Agency (FIA) cannot investigate the SBP governor, its deputy governors, its officers, and board and committee members. Former officials also received immunity from the NAB and the FIA.
This could be due to an ongoing investigation against SBP agents in the alleged non-transparent merger of the defunct KASB Bank.
In the future, the federal government cannot legislate without consulting the SBP. “The bank is consulted ex ante on any draft legislative act concerning it”, specifies article 46B paragraph 8.
The definition of “monetary liabilities” was introduced, which means that the bank’s total liabilities are reduced by the sum of “government deposits, amounts due to IMF, World Bank, Asian Development Bank ( AfDB) or other similar bodies”. instruments, deposits of foreign central banks or sovereign wealth funds, drawn swap lines of foreign central banks and balance of central banks participating in any clearing union”.
Currently, Chinese currency swaps, foreign central bank deposits and IMF loans for balance of payments are among the liabilities of the SBP, which underestimate the federal government’s total public debt.
Instead of the federal government, the compensation, terms and conditions of service of the Governor and Deputy Governors will be determined by the SBP Board of Directors.
The governor’s salary will be determined keeping in mind the prevailing salaries in Pakistan’s financial sector which is in the hundreds of millions of rupees in some cases.
According to a new clause, protection for actions taken in good faith and indemnification, “No suit, suit or other legal proceeding, including for damages, shall be brought against the banks, the board of directors or the members , Governor, Deputy Governors”.
The finance minister said the cabinet also approved the public enterprises bill. The Public Enterprises (Governance and Operations) Act 2021 aims to improve the management and financial efficiency of public enterprises. The proposed law applies to all corporations and corporations owned and controlled by the federal government, including those created under special laws.
“Notwithstanding anything contained in any other law now in effect, the primary objective of a commercial public enterprise must be to be a successful business,” according to the bill.
The Minister of Finance said that the procurement of public companies has been exempted from the rules of the PPRA so that decision-making is accelerated.
The Prime Minister’s adviser on institutional reforms and austerity, Dr Ishrat Husain, said state-owned enterprise losses were further reduced to 123 billion rupees in the last financial year. He said performance contracts will be signed and governance and management of public enterprises will be separated.
Husain said 51 public companies were in profit, one was breakeven and 33 were in loss. To a question, he indicated that 44 public sector companies will be privatized in three phases.
“The Federal Government shall not require a commercial public enterprise to undertake a public service obligation that deviates from the primary purpose, except as specified in Schedule II of this Act,” according to The law project.
It has been proposed that commercial state enterprises should give “independent procurement policies” to be approved by the federal government and “shall be solely responsible for compliance with the provisions of the PPRA Order of 2002, insofar as this may be ordered by the federal government”.
The board of directors of each public company must, before the start of each financial year, adopt a business plan for the following three years, which contains information on operations, strategic direction and financial performance measures and non-financial public enterprise.
In order to appoint the members of the board of directors, a nomination committee has been proposed which will be headed by the minister in charge and its members will be the divisional secretary, the finance secretary or his representative, and two specialists from the private sector. having 20 years of experience. live.
Through this proposed article, the government has eliminated the role of the Federal Cabinet in appointing members of the boards of directors of state-owned enterprises.
The majority of board members of public companies will be independent directors.
The positions of Chairman of the Board and CEO of the company will be separated. It was proposed to grant the board of directors the power to appoint the general manager.
Published in The Express Tribune, March 10e2021.
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