State Bank Act amendments
It is a principle in the world of sovereign lending that those prerogatives a ruler cannot manage or handle are eventually taken out of the ruler's hands. What the amendments to the State Bank Act, as well as the Nepra Act, aim to do is take key powers out of the hands of the government, mainly because the government has - over the years - demonstrated an inability to wield these powers in any productive way. In fact, successive governments have used these powers to try and compensate for their shortcomings in other areas.
In the case of the power sector these shortcomings are primarily reflected in the mounting circular debt, which is the result of many failures not just the rising cost of power.
And in the case of the State Bank, these shortcomings are the failure to undertake meaningful tax reform and the erosion of the country's competitiveness in global markets.
In response to this persistent failure, Pakistan's creditors are now telling the government to surrender the power to notify tariffs and vest it in the hands of the regulator. The idea is to arrest the continuously rising circular debt. In addition, they are also saying that the power to print money or determine the price of money (interest rates and exchange rate) - that belongs to the State Bank - should also be surrendered. The idea is to prevent recourse to printing of money to pay government bills or provide support to the private sector, as well as rig the exchange rate to compensate for growing import dependence and eroding export competitiveness.
It is a principle of sovereign lending that those prerogatives a ruler cannot manage are eventually taken out of the ruler's hands.
In the power sector they are bringing in what they call the 'principle of automaticity' whereby power tariffs will be automatically adjusted by the regulator - Nepra - to cover any shortfalls in recoveries and to avoid the damaging effects of 'delayed notification' by the government. The process will begin with two massive power tariff hikes in June and July this year, followed by another in July next year. After that, it's all up to the regulator.
The amendments to the State Bank Act go a few steps further. Not only will the government be removed from the process that decides the price of money - interest rates and the exchange rate - but the State Bank will also be prohibited by law to lend directly to government (a process tantamount to printing money to pay the government's bills) as well as operate refinancing facilities to support the private sector directly for any purpose other than fighting inflation.
A glance at the past is necessary to grasp the full impact of this. When Pakistan entered an IMF programme in November 2008, in the thick heat of the great financial crisis, it was printing money to pay for its rising deficit, equal to 7.4pc of GDP at the time, a mammoth amount. The IMF required that this printing of money should stop altogether and the outstanding stock of government borrowing from the State Bank be brought down. These caps on borrowing from the bank remained in place throughout the programme period, but the government resorted to it again after 2016, when it left its second IMF programme.
But the government had another way to use State Bank financing (meaning printing money) to compensate the private sector for the losses that it was being burdened with under the ongoing adjustment. In December 2007, the State Bank announced what it called the Long-Term Financing Facility to extend cheap credit to exporters to buy plant and machinery. A few years later, this was followed up with another such financing facility designed to provide cheap credit to affectees of the floods, also as a temporary measure.
Such facilities have mushroomed over the decade since then and it is hard to get an exact tally of how many are now operating, and the amounts disbursed through them have multiplied into hundreds of billions of rupees. More recently, the government introduced another such facility, calling it the Temporary Economic Refinance Facility and gave Covid as the reason.