Proposed draft of SBP’s Amend Bill 2021: Quasi-fiscal operations to be discontinued

ISLAMABAD: Despite requests made by the Ministry of Finance, the IMF has outright rejected proposal to allow the continuation of quasi-fiscal operations on the direction of the government and Monetary and Fiscal Policies Coordination Board (MFPCB) in the revised agreed draft of the State Bank of Pakistan (SBP) Amendment Bill 2021.

All such requests made by the Ministry of Finance were turned down by the IMF and it was decided that the quasi-fiscal operations would be discontinued under the proposed draft of the SBP’s Amendment Bill 2021. Now the government will submit the agreed draft in the Parliament after seeking approval of the federal cabinet probably next week.

Under the existing SBP’s Act 1956, the Central Bank is mandated to carry out quasi-fiscal operations, including rural credit, industrial credit, export credit, loans guarantee and housing credit. However, in the proposed SBP’s amendments bill 2021, the quasi-fiscal operations, defined as monetary actions taken on behalf of the government, shall be discontinued.

Nevertheless, refinancing facilities, which the SBP has used to support access to credit in underserved sectors are still allowed. There is an altogether changed mechanism for even holding coordination between the Ministry of Finance and the SBP in the draft SBP’s amendment bill.

Under the existing SBP Act 1956, the Monetary and Fiscal Policies Co-ordination Board exists. However, in the proposed agreed draft of SBP’s Amendment Bill 2021, this Coordination Board has been proposed to be abolished.

Although, there is just wording of holding coordination and nothing is binding upon the SBP to accept any decision taken at the forum of MFPCB but the IMF totally rejected even continuation of such coordination board in the revised draft of SBP’s Amendment Bill 2021.

In a bid to present an argument in the favor of revised draft of SBP’s amendment bill 2021, it was stated that the Governor SBP and the Finance Minister shall establish a close liaison with each other and shall keep each other fully informed on all matters, which jointly concern the bank and the Finance Division.

Although, independent economists are opposing even this revised draft of SBP’s amendment bill tooth and nail and arguing that it would compromise our sovereignty. Renowned economist Dr Kaiser Bengali tweeted and said that "passage of IMF dictated SBP Amendment Bill will be the death knell for our economic sovereignty".

However, in the support of SBP’s amendment bill, it was argued in the preamble that international experience and economic literature have demonstrated that countries with an independent and accountable central bank have lower inflation and greater financial stability over long periods of time. This is because independent central banks have their objectives clearly specified and are held accountable for their actions to achieve their objectives.