Waqar Masood Khan
The IMF Programme 2008 had opened the issue of SBP autonomy. The programme was suspended midway. Measures explicitly limiting the extent of Government’s borrowing authority and the path of retirement of existing debt owed to SBP were not considered sufficient. Indeed, as time passed, demands for what is meant from autonomy kept increasing as would transpire at next round of contact with the Fund.
This occasion arrived in June 2013. The economy was in shambles as all leading indicators – growth, inflation, fiscal deficit, policy rate, foreign funding, reserves, circular debt – were in dire straits. The Fund was equally concerned as much of its funding under the Stand-By Arrangement (SBA) was falling due within the next 18 months. Accordingly, as soon as the new Government of PML (N) presented its first budget on 12-6-2013, based on its homegrown agenda, within week a Fund Mission arrived to open a dialogue on a new long-term programme called Extended Fund Facility (EFF).
Besides a performance criteria, an EFF programme requires a fairly rich agenda of structural reforms. The SBP autonomy was thus included in this agenda, despite government’s point of view that sufficient work had already been done in this area. Evidently, the Mission had little control over pushing this reform. In fact, the Mission thought that a more durable reform was to include a steep reduction in the stock of Government debt during the programme period. This approach would have corrected the infirmity in the last reform made under SBP (Amendment) Act, 2012 whereby two provisions were made: zero borrowing on a quarterly basis; retirement of debt stock over an 8-year period. Unfortunately, these provisions were not diligently observed, for with the drying up of foreign inflows, domestic borrowings were largely financing rising deficit. In this background, the demand for further tightening of government borrowing from SBP was indeed warranted.
The Mission included a performance criterion stipulating a sharp reduction in the government debt from SBP. Clearly, it meant not only that there would be no fresh borrowings from SBP but more importantly that the government would make additional borrowings from other sources to retire SBP debt. Pakistan accepted this challenge. By the time this reform became effective, the debt stock had risen to Rs.2700 billion (compared to Rs.1400 billion in 2012). The programme envisaged a reduction of some Rs.1300 billion to bring the stock to Rs.1400 billion.
Besides agreeing to the above reform, a structural reform on autonomy was also imposed. The required action read: “Amendments to the SBP law will be enacted to strengthen the autonomy of the SBP, including full operational independence in its pursuit of price stability as its primary objective, complemented with enhanced governance structure including strong internal controls, by end-March 2014 (structural benchmark). Among other things, the amendments will establish an independent, decision-making monetary policy committee to design and implement monetary policy. The amendments will also prohibit any form of new direct lending from the SBP”.
The government yielded to this conditionality because the programme was critical. It was also hoped that in course of time the Mission would be convinced that none of the proposed measures would add anything significant to the state of autonomy already in place. But as the programme proceeded more interesting things emerged.
The Fund laid down a whole set of reforms that were meant to be accomplished under the above conditionality. It was reminiscent of the draft law that was magically produced in 2009 at the close of the then Governor’s term: rewriting the objectives of SBP, government director to be removed from the board; monetary policy committee be independent of the Board and the government; establishment of a reserve fund with priority allocations before transfer of profits to government with additional safeguards on profit transfers; indemnification by the Government of losses to be suffered by SBP; the term of the government and directors not to coincide and many more.
It transpired that there was a so-called Safeguards Review Mission of IMF (basically from the capital market department) that had visited Pakistan in 2013 after the programme was negotiated and held the review with the SBP staff and produced a set of recommendations, which were now required to be implemented as part of the programme. Interestingly, the Safeguards Mission never consulted the Government of Pakistan and wrote its report without its consultation. It was also not known that the conditionality would evolve as the recommendations from Safeguards Mission would be received neither that the conditionality made any such provision at the time of negotiations.
The resolve and force with which the Fund pushed this agenda was incredible. With some dismay, it appeared that there was a keenness on the part of the Fund to foster friction between the Government and the SBP. As we would argue, the reforms did not succeed in bringing about the intended results partly due to lack of ownership of the authorities.
Returning to the main discussion, the reduction in government debt owed to SBP was an onerous condition and was part of the performance criteria. Thus, every quarter it was to be met. From Rs 2700 billion, with heroic efforts, Government succeeded in bringing down the stock of debt to Rs 1400 billion and this was supposed to continue beyond the program period, as required under Section-9C enacted in 2012. A significant part of this reduction was made possible due to external borrowings made available because of the improving health of the economy under the program. Foreign borrowings reduced dependence on domestic borrowings and were significantly cheaper besides helping build reserves (as all such borrowings were counted as an adjuster on reserves accumulation path)
The government agreed to establish an independent monetary policy committee (MPC). Two new Sections, 9D and 9E were added to the SBP Act, 1956 through the SBP (Amendment) Act, 2015. Section-9D specified establishment of MPC together with its composition while 9E specified the functions of MPC. This provision is to the complete exclusion of the authority of the Board of Directors to the extent of the functions assigned to the MPC. Thus, the formulation of monetary policy and all the ancillary matters are assigned to MPC and the Board has no role it is deliberations. There are four members from the SBP staff (including Governor as Chairman), three members of the SBP Board and three members (economists) to be nominated by the federal government on the recommendation of the Board. No representation from Government is allowed. Another amendment was made in Section-9C, extending the period for retirement of government debt from 8 to 12 years.
(To be concluded) (The writer is a former finance secretary) [email protected]
