Autonomy of the State Bank of Pakistan

The recent public debate about the autonomy of SBP needs to be reviewed in its historical perspective. Till 1993, the SBP was administratively treated as a subordinate entity of the Ministry of Finance (MOF), the banking sector was controlled by the government mainly through the Pakistan Banking Council (PBC) and monetary policy was taken as an extension of the fiscal policy.

The SBP, being administratively under the control of MOF, its Board of Directors and governor could take no major management or policy decision without prior approval of MOF. Moreover, the SBP Board of Directors and its governor could be hired and fired without any basis by MOF, and SBP could not release any statement or analysis of the economic situation in Pakistan or even its own mandatory Annual Report without prior clearance of MOF.

In the matter of overall financial system, licensing, inspection, supervision, regulation and management of nationalized banks and non-bank financial institutions were in the hands of MOF, and it mainly used the PBC for this purpose. In the process, the SBP was relegated to a secondary position and marginalised as regulatory authority of the banking system.

There was no monetary policy worth the name as government was deciding on its own how much to borrow from the SBP and commercial banks and on what terms and how much subsidised loans were to be made available to priority sectors and public enterprises. As regards credit to the private sector, the annual credit plan prepared for it by SBP was subject to approval by MOF, and thereafter implemented by SBP through administrative decisions. In spite of it being the central bank of the country, SBP was not authorised to use the conventional instruments of credit management without approval of MOF.

During 1993-1997, all aspects of functioning of SBP in relation to the requirements of a modern state were fully reviewed in policy circles and thereafter necessary legislation was passed to give statutory autonomy to SBP. It was done in two installments, in 1993 and 1997, by the PPP and PMLN governments respectively.

Those indiginously-developed legislative reforms covering SBP's own management and administration, regulation and supervision of the banking sector and formulation and conduct of monetary policy were introduced through appropriate amendments in the SBP Act, the Banks Nationalization Act and the Banking Companies Ordinance.

These reforms gave to SBP for the first time administrative and regulatory autonomy and independence in the formulation and implementation of monetary policy. Under those reforms, tenures of Board of Directors and governor of SBP were given legal protection, the SBP management and administration were freed from the supervision of MOF, PBC was liquidated and SBP was made the sole regulatory authority of the banking and financial system.

Most importantly, it was mandated that market-based monetary policy was to be formulated and implemented independently by SBP based on the targets for growth, inflation and balance of payments agreed in a high- powered Monetary and Fiscal Policy Coordination Board (MAFPB). These solid reforms legislated by PPP and PMLN governments were endorsed but not dictated by the IMF.

The SBP took prompt action to assert its administrative and regulatory autonomy and promptly recruited and trained additional professional staff to take up its enhanced responsibilities effectively. Its administrative and regulatory autonomy has remained intact since then, requiring no major revisions in the law.

However, in the matter of monetary policy, every government resisted the SBP's effort to limit its borrowing at a level consistent with the monetary targets set under the monetary policy.