We’re heading back to the days of The East India Company, the opposition tells us, about the proposed legislation that seeks to increase the autonomy of the central bank. The Company, here, being the IMF at whose behest the upcoming legislation is being passed.
As opposed to general perception, the bit about increasing the tenure of the SBP Governor – and making it difficult to get rid of him – isn’t the main bone of contention for the finance ministry. On the face of it, all governments profess that they want to give a reasonable level of autonomy to the central bank, and this bit doesn’t really clash with that, regardless of how little they might actually want it.
Not allowing the federal government to borrow directly from the central bank is also not too contentious an issue, in fact.
The actual contentious bit relates to the issue that reared its head most recently between the central bank and the finance ministry: the interest rate. The rate, both in theory and practice, is decided by the central bank. But the how is a delicate dance between the SBP and Q Block (a sexier term for the finance ministry), one that involves a power play that spreads out over a number of boards and committees.
Enter: the Board
In this tripwired minefield, it is the proposed dissolution of a pivotal board that is giving a lot of fuel to the rumours of ceding a lot of autonomy to the IMF – through the incumbent Governor, who was allegedly brought in by the Fund to help steward the economy for the current program between the government and the Fund. The incumbent Governor is a former IMF employee, yes, but the timing of his appointment and that of the IMF’s loan program, made it difficult for people not to look at him with a lot of suspicion.
That board is the Monetary and Fiscal Policies Co-ordination Board. Its job is exactly what it says on the label. Enshrined in the SBP Act, 1955, the board that will make sure that the finance ministry and the central bank take steps in tandem. That the policies aren’t at loggerheads with each other. That the left hand should know what the right hand is doing.
If one were to look at its constitution, however, we get a clear idea of which is the upper hand. Chaired by the finance minister, each of the seven-member Board is appointed by the federal government. In case of a disagreement, the SBP Governor is outnumbered six-to-one.
The proposed legislation seeks to dissolve this Board to replace it with just a head-to-head mutual agreement between the finance minister and the SBP Governor over policy. In case there isn’t an agreement over monetary policy, well, you can’t just get rid of the Governor anymore now, can you?
This really does make the central bank’s position better in the aforementioned delicate dance. However, though the finance minister might have expressed some reservations about the dissolution of the coordination board, he still sits pretty in knowing his ministry’s considerable position over a particular committee.
Enter: the Committee
The legislators, back in 1955, knew that the where-its-at of the central bank was going to be the determination of the interest rate. To that end, the SBP Act lays out the constitution of the central bank’s Monetary Policy Committee. Even if the SBP Governor gets some more equitable footing in the successor to the coordination board, he is all but outnumbered in the MPC.
He chairs the committee, yes, but it’s one-member-one-vote here, even if his is the casting vote in case of a tie.
He can choose an additional three senior executives of the SBP to be on the MPC. That’s four votes in total for the central bank chief. On the other side, however, the lot at Q Block decides three external economists to be the members of the MPC.
So? That’s still the Governor’s four versus the finance minister’s three.
Well, there are still three members left over. They will all be from – and chosen by – another board.
Enter: the Other Board
The State Bank of Pakistan’s Board of Directors is for the “general superintendence and direction of the affairs and business of the Bank.”
The Board of Directors is generally the most important body of any organisation and though the SBP is no exception, it is the Monetary Policy Committee that trumps its importance somewhat. Not to belittle the BoD, though. It does have considerable powers. But in the context of this article, it is only being mentioned because three members of the MPC are drawn from it.
The Board of Directors are the Governor and eight other members who are appointed entirely at the discretion of the federal government (read finance ministry) and these don’t even have to be economists; even banking, accountancy and MBA-types can be chosen. The only restriction on the federal government is that each of the four provinces will have at least one member amongst these eight.
To sum it up, the SBP Governor is outnumbered eight-to-one here.
No points for guessing who will get to choose the three remaining members of the Monetary Policy Committee. So that yields six votes on the MPC to the finance ministry and four to the central bank.
Now anyone acquainted with the nuances of monetary policy will tell you that, regardless of how extremely central the interest rate is as a tool, there is still more to monetary policy. Like, the SBP-mandated Cash Reserve Ratio, for instance.
Although it is technically very much what a body titled The Monetary Policy Committee should be deciding, it has been somewhat up to the discretion of the Governor. The legislation seeks to change that. But not really.
Enter: another committee
The proposed legislation seeks to bring in an Executive Committee over to the central bank.
The aforementioned decisions like the CRR and other executive decisions have to be run by this committee by the Governor. The catch here is that, barring the Deputy Governor, all of the members are going to be appointed by the Governor. And to further twist the knife, the quorum of the Executive Committee is the Governor….and just one other member.
Other than perhaps the noting of minutes, this particular committee won’t change much in the scheme of things. And Q Block doesn’t seem to want to tread on this particular turf yet anyway.
Tarin has an edge…barely
The finance minister isn’t all too perturbed by the dissolution of the coordination body. He will still pretty much call the shots in the scheme of things.
He does have the numbers. But he will have to keep all of them (eight on the Board of Directors and definitely all six on the MPC) in line. Do keep in mind that the proposed legislation is also going to make the BoD and MPC members difficult to remove.
If there are multiple precedents for SBP Governors getting too big for their shoes, how will he ensure all six of his appointees in the MPC stay in their lane?
But what about future finance ministers?
There is also another scenario that the new legislation actually does give the central bank governor a disproportionate power in the dance. And that is in situations like the PPP government of ‘08-’13 and definitely the current PTI government. In these two dispensations, the finance portfolio has been a game of musical chairs. Not during the League’s tenure, where it was very clear that it was going to be Dar all the way. He was only removed from the portfolio only because of NAB, not because of some party intrigue by his successor Miftah Ismail.
In situations like those of the two governments, once the finance minister is removed from office, his appointees in the SBP’s Board of Directors and its Monetary Policy Committee might not want to play ball with the next guy. That’s a kind of vacuum that could bode well for the central bankers.
The Republic will inevitably stand up to The Company:
If all goes well, the IMF program will end in Oct, 2022. The current government will be under no compulsion to stick to the new legislation.
The opposition has put in enough political capital into the idea that the legislation is a form of neo-colonialism. In the likelihood of any of the other two parties forming government in ‘23, they are also likely to revoke the legislation and reap political mileage from it.
All of it doesn’t have to go out, however. If the central bank doesn’t rock the boat too much, it wouldn’t rile the next government enough to do away with some of the clauses of the proposed legislation, like the tenure security of the Governor and the members of the Board of Directors and the Monetary Policy Committee.
What is autonomy, then?
We need our civil servants to have autonomy. But for them to have too much autonomy runs counter to what democracies are supposed to look like. Even those civil servants who are supposed to be independent in all democracies (the judiciary) are bound to comply with the laws that the representatives of the people have drafted.
Questions about the autonomy of civil servants – not only the top brass at the central bank, but also the Deputy Commissioners managing the districts and the SSPs policing them – are to be addressed by the people themselves. There might be no one right answer for all nations. There might not be even one right answer for one nation through all of time.
These are issues that the polity has to grapple with, in a free and unfettered manner. Not bulldozed through by foreign bodies that hold some leverage over us.
Nice Analysis based on facts.