SBP:  Autonomy through Heteronomy

Dr. Ikramul Haq

On 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). It is view of the PTI government that SBP’s role as an autonomous institution would help them lower the inflation rate, which will ultimately lead to financial stability. Therefore, the government of Pakistan prepared the State Bank of Pakistan Amendment Bill 2021 [text of it has not been made public till today and only objectives are provided at the website of Ministry of Finance: http://www.finance.gov.pk/SBP_Amendment_Act_2021.pdf ] intending to further amend the Act of 1956:

• 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.

Apart from above, the proposed amendments extend absolute immunity to SBP’s Board Members, Deputy Governor, member of any board committee, and monetary policy, officers, and employees of the central bank. The State Bank of Pakistan Amendment Bill 2021 [“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 SBP fails to achieve the assigned objectives? Since 2018, SBP is operating almost independently and pursuing policies that are not aligned with public interests.

Similarly, the Ministry of Finance [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 did 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 tow lenders’ policies.

In the existing circumstances, SBP may be given autonomy but ultimately it will remain subservient to IMF. Mr. David Lipton, First Deputy Managing Director and Acting Chair already 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, 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 commitment to 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 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.

The revival of IMF’s suspended US$ 6 billion Extended Fund Facility (EFF), according to Adviser to Prime Minister on Finance & Revenue, Mr. Shaukat Tarin, is on the card. In a statement reported in Press report of November 1, 2021, he said: “a constitutional amendment would be required to pave the way for the approval of the of the State Bank of Pakistan (SBP) Amendment Bill, 2021 in its present form but the government lacked the two-thirds majority in parliament”. The approval of the Bill, he further said, “was the condition that was hampering a deal between Pakistan and the International Monetary Fund (IMF) for $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 much-awaited tranche will take some more time after failure of above-mentioned dialogue. It is pertinent to mention that in letter of intent to IMF chief in 2019, Pakistan ensured IMF’s chief for making legislative changes in order to give SBP autonomy over its operations. Now it has become a precondition for the release the tranche.

In its Review [PR 21/83], the IMF asked Pakistan regarding the implementation of the conditions agreed including the autonomy of SBP. Now, the PTI Government is 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 in media that the PTI Government wants to retain the right to set policy direction as well as assigning inflationary targets to the SBP. The Government also wants to keep the option of borrowing from the SBP. It is widely reported in the media that this time, the IMF representatives are not agreeing to relax these conditions for reasons more related to geo-political consideration rather than on purely technical emulation though in many areas improvements have been shown by the Government.

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

Similarly, before opting for the current IMF programme, the Prime Minister, Imran Khan, was a strong opponent of the IMF’s bailout. In a popular political sloganeering, he even said that he would even prefer suicide rather than availing the same. Thus, the PTI Government initially was confused about the selection of forums to avail financing to come out of financial woes inherited by it and run the affairs of the state 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 taking begging bowls from one country to another 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 IMF programme, it is impossible to meet the required financing needs. Therefore, for the first time in history, Pakistan’s Premier personally traveled to United Arab Emirates to meet the IMF chief and assured her about Pakistan’s desire of opting 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 Pakistan, and Reza Baqir, Governor State Bank of Pakistan. This showed the will of opting for 39-months extended arrangements under the IMF’s EFF for the amount of US $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 exemption, including zero-rated products, increase the excise on cigarettes including implementation of new duties, reduce personal income tax threshold as well as increase the rates, enhancing sales tax on petroleum products plus withdrawal of subsidies offered in the past.

Similarly, on the monetary and exchange policies front, both Advisor to Prime Minister on Finance and Governor SBP assured the IMF chief that Pakistan “will maintain a flexible market-determined exchange rate and assured the IMF chief that the exchange rate would be determined by the market, strengthen state bank monetary policy and operational framework”.

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

Despite multiple assurances of implementation of a self-planned and agreed economic reforms agenda, the PTI Government failed to implement the same. Pakistan committed to increase tax revenue by 4 to 5 percent of GDP. After lapse of three years despite eliminating of various exemptions and concessions, including the imposition of new taxes, Pakistan’s tax to GDP ratio could not reach the level as conveyed to the IMF. Similarly, we have committed to carrying the overall deficit in compliance with the Fiscal Responsibility and Debt Limitation Act (FRDLA) and debt on a firm downward trajectory, however, as reported in the media that government 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, whereas, violated all other three targets with huge margins. Similarly, the second commitment was related to structural reforms in monetary and exchange policies. In this regard, we have committed to ensuring 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 recapitalization requirements for which the PTI Government introduced the Bill. This Bill defines three objectives for the SBP, namely, Primary objective: Domestic Price stability, Secondary objective: Financial Stability, and Tertiary objective: Support Government’s economic policies to foster. However, the Bill for autonomy of the SBP is still unclear.

As per the Bill, the SBP will ensure domestic price stability. However, the law does not define the meaning of “price stability”.  In current administrative structure, managing prices is the domain of federal as well as the provincial governments and expecting SBP to work for domestic price stability seems to be a misplacement of the tasks. Our policymaker needs to assess the role of central bank in respect of food and energy inflation, which is a result of tariffs, duties, taxes, domestic as well 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 policy rate and exchange rate. The IMF and independent lenders have always advocated for driving exchange rate through market forces. This can ease pressure of FX reserves, especially where 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 market which can manipulate the exchange rate and the in such circumstances central bank cannot simply alienate itself.  Pakistan is an import-based country and slight devaluation can have a multiplier effect of overall import bill and to avoid this vicious cycle the oversight role is much-needed.

The current provisions of SBP Act of 1956 through subsection (1) of section 9C offers 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 complete ban on government borrowings, which seems to be a positive move. It remains a fact that government has been borrowing from the SBP in high volumes and it has found an easy way to bridge its deficits and on the other hand it has reduced the fiscal space for commercial and domestic borrowers. However, the blanket ban would put the 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 spirit of accountability, especially when politicians have charged with criminal offences merely on a random application from “undisclosed sources”.

All institutions must be held accountable for their decisions and actions, no institutions or department shall have privileges of immunity or special relaxations. The law must be applied in an equitable and just 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 government and IMF. For any country having sovereignty over its economic and legislative decisions, this should have been based on internal requirement 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 will be a new and will further deepen the ongoing economic disaster, which can ultimately lead to the 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 taxpayer through regulations and polices to boost economic activity. This value generation cycle can help lighting up multiple economic indicators that are currently glooming out.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing.  He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition,  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary andMaster Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

The recent publication, coauthored with Abdul Rauf Shakoori and Huzaima Bukhari is Pakistan Tackling FATF: Challenges & Solutions

available at:  https://www.amazon.com/dp/B08RXH8W46  and https://aacp.com.pk/

He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequelPakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

Twitter: DrIkramulHaq