The New SBP Bill: When Central Bank Autonomy Goes So Far That It Challenges State Sovereignty

The New SBP Bill: When Central Bank Autonomy Goes So Far That It Challenges State Sovereignty
The current International Monetary Fund (IMF) program has been in limbo, and for its revival, the PTI government has agreed to the passage of some unconstitutional amendments by the Parliament. Unfortunately, the IMF mantra to “do more” has been encouraged by the timid negotiators of the PTI government. Regardless of whether it were beneficial or not, the cascade finance ministers appointed by the PTI, and its economic team, have been conceding point by point to all IMF demands. The desperation of this incompetent government has further emboldened the IMF to demand sweeping amendments in the State Bank of Pakistan Act, 1956 (''SBP Act'') as a “prior action” to be achieved by the 17th of December 2021. Not satisfied with having its “own man” as the Governor of the State Bank of Pakistan (SBP), the IMF is now pushing for amendments which would make SBP, our central bank, completely independent of the other organs of the state – and literally turning it into an outpost of the IMF in Pakistan!

Earlier this year, the PTI cabinet approved the State Bank Amendment Bill, 2021.

Let us now discuss each of the significant amendments being pushed down our throat by this puppet PTI government in the name of IMF.


a) Change the objectives for which the Central Bank was established:

The Preamble of the SBP Act states that the Bank has been constituted to “regulate the monetary and credit system of Pakistan and to foster its growth”. By virtue of the proposed amendments, the development role of the SBP has been completely diluted by calling it a “tertiary objective”. Furthermore, the “quasi-fiscal” functions of SBP are being discontinued.

In a Third World country with a low domestic savings/investment rate, a sudden halt to the SBP’s development role can jeopardise growth and exports. Exporters are dependent on the Export Refinance Facility (ERF), which is in place since 1973, and Export Oriented Industries are keen for Long Term Finance Facility (LTFF) to set up export-oriented industrial units.

The banking sector in Pakistan is already reluctant to make advances to the private sector. The Advances-to-Deposits ratio is less than 50% and declining. It was only with the active and aggressive prodding of the SBP that the banking sector would lend to the three priority sectors i.e. Agriculture, Housing and Small and Medium Enterprises (SMEs) – albeit the latter two still at a very low level. With growth no longer a priority of SBP, its commitment would wane with further downside risks to the economy.


b) Eliminate the provisions for borrowing by the Government from SBP:

Section 9C of the SBP Act gives limited facility to the government to borrow from the central bank. The law states that the government may borrow from the central bank, but at the end of each quarter, it has to be returned, leading to zero net borrowing.

This provision was meant to be a safeguard for the government against collusion of the commercial banks at the time of auction of the Government Paper. However, the withdrawal of this provision would put the Finance Ministry at the mercy of the commercial banks.  This provision may not have been strictly followed in the past, but that certainly does not make it eligible to be deleted altogether. What is required instead is to ensure that the government abides by the zero-net-quarterly borrowing. This can be achieved by empowering the SBP to make adjustments in the government’s Account no. 1 in this regard at the end of each quarter.


c) Discontinuation of the Monetary and Fiscal Coordination Board:

The Monetary and Fiscal Coordination Board is an essential forum to ensure that the monetary and fiscal policies are cohesive. The forum provides a platform for robust and candid discussions that lead to framing of these policies. The SBP Bill proposes to abolish this forum and limit the coordination to the extent of “establishing liaison” between the Governor and the Finance Minister only. This is contrary to the objectives of SBP. It is indeed a subjective and vague terminology, which shies away from specifying the consequences of a lack of establishment of such “liaison.” The coordination of the fiscal and monetary policies are critical cornerstones for the country and certainly cannot be left to the whims and caprice of the Governor.


d) The Governor is being made completely independent of the State:

The Bill proposes that the Governor, once appointed, can only be removed "for serious misconduct as determined by a court of law.” The same Bill provides that no authority can initiate even an inquiry without the approval of the Board of Directors. The Governor is the Chair of the Board. Thus, he is completely insulated from even the initiation of any proceedings. So how can he be convicted for “serious misconduct as determined by a court of law?” With the influence of the IMF on the rise, the Governor will be more like a holy cow who is above the laws of Pakistan; serving as IMF representative rather than a state functionary watching the interests of the people of Pakistan.


e) The Governor and the Board will not be accountable to any state institution:

Through the proposed amendments, the accountability of the Governor has been limited to the extent of submitting SBP annual report to the Parliament. This is a most benign act proposed in the name of accountability which in effect would further insulate and protect the Governor. This amendment is not enough for the purpose of holding SBP accountable and must be augmented with consequential action in the event that such a report is rejected.


f) Terms and Conditions of Service of the Governor to be determined by the Governor himself:

The terms and conditions of service of the Governor are to be determined by the Board, which is Chaired by no less than the Governor himself. One wonders whether the so-called “independence of decision-making” will only be self-serving if allowed to be amended in this manner.


g) Appointment of board members to be made on the recommendation of the Board:

The Government’s powers to appoint Board members has been proposed to be limited to choose from amongst those who are recommended by the Board only. This proposed amendment creates a Board not representing the state, but a Board that protects its own interests by recommending their own proxies to appoint/replace them. The Board possibly can be in perpetuity either directly (10 years) or through their nominees. This will lead to inbreeding.


h) Appointment of Deputy Governors:

It is proposed that the Deputy Governors will be appointed by the federal government from amongst a panel of three “in order of priority” recommended by the Governor. The words “order of priority” suggest that these will actually be appointed by the Governor. Thus, their appointment is also being taken out of the hands of the federal government.


i) Term of office of the Governor:

Under the existing law, the Governor is appointed for three years but under the SBP Bill, his tenure of office will be five years and extendable by another five years.


j) Removal of Governors, Deputy Governor and others:

Section 15 of the SBP Bill states: “The appointing authority shall remove the governor, the deputy governor and non-executive director or external member of the Monetary Policy Committee from the office in case of the occurrence of any of the incompatibilities or disqualifications specified in section 13 or if such person is found guilty of serious misconduct as determined by a court of law.”


This clause violates Article 25 of the Constitution, which provides for the equality of the citizens. Be that as it may, invariably the time consumed to prove charges of misconduct in a court of law may turn out to be longer than the tenure of the official in office. It is quite likely that such an official leaves the Country after completing the respective tenure, long before the decision of misconduct attains finality.  Such an amendment is counterproductive and only serves the interest of the current and past officials, not so much the country.


k) Future amendments in the SBP Act:

The SBP Bill entails that in future the SBP Act could only be amended with the prior consent of the central bank, which tantamount to curtailing Parliament’s powers to legislate.

It is proposed in subsection 5 of the Section 46B that the SBP shall “interact and communicate” with the Parliament. The words “interact and communicate” essentially connote the right to speak. In terms of Article 57 of the Constitution, only the Prime Minister, Federal Ministers, Ministers of State and Attorney General are entitled to participate in the proceedings of the Parliament. This amendment is proposing to confer on the SBP or its functionaries a right to interact and communicate with the Parliament which they are Constitutionally and legally barred to do. As per the Rules of Business of the Federal Government, it is the Finance Ministry which, through the Finance Minister, is legally competent to ''interact and communicate'' on behalf of the SBP with the Parliament.

Similarly, subsection 8 of Section 46B that pertains to the functional and institutional autonomy, proposes that: “The bank shall be consulted ex ante on any proposed legislative act related to the bank”.

The power to legislate is a prerogative vested solely in the Parliament and neither the Constitution nor any law provides for any consultation mechanism of the Parliament directly with the SBP prior to the passing of any legislation relating to the SBP. And if the SBP desires to give input, they can do so only through the Finance Ministry.


l) Protection against Criminal Investigation against officials of SBP:

The SBP amendment Bill provides protection to the officials of the State Bank against criminal investigations by anti-corruption agencies.

Subsection 3 of the Section 52A is proposed to be amended as follows: “Notwithstanding anything contained in any other law for the time being in force, including National Accountability Ordinance, the FIA Act, no action, inquiry, investigation or proceedings shall be taken against any official of the bank by the NAB or FIA or provincial investigation agency, bureau, authority or any institution by whatever name called without prior consent of the board of the directors.”

And as per subsection 4 of section 52A: “The protection and indemnification shall mutatis mutandis apply to former directors, governors, deputy governors, members of any board, committees, monetary policy committee, officers and employees of the bank for any act of commission and omission done during the service of the bank.”

The kind of protection that the SBP Bill is granting to its current and former Governors and officials is unique and not even available to a judge of the Supreme Court of Pakistan – what to speak of functionaries working in the financial sector!



As such, the proposed amendments will create a Governor SBP who will be completely independent of any state institution, especially as he chairs the Board himself and with the unbridled powers and protection to the Governor, he has actually been turned into a Governor-General of Pakistan, above and beyond the writ of the Pakistani laws.

Additionally, the amendments proposed in Sections 15, 46B, and 52A relating to the removal of the SBP Governor, limiting Parliament’s powers to amend the SBP law in future and giving a blanket protection to the SBP Governor and other officials from criminal proceedings respectively, clearly violate the Constitution of the Islamic Republic of Pakistan. These unconstitutional and discriminatory amendments that the PTI government is mysteriously trying to bulldoze through the Parliament are liable to be struck down by the apex court, even if so enacted. It is indeed intriguing and certainly requires a probe as to who negotiated and agreed such flawed, illegal and unconstitutional amendments with the IMF and on whose behest this was done. It is extremely concerning to note how the Cabinet approved the SBP Amendment Bill 2021 which included these unconstitutional and discriminatory amendments. There was a serious lapse of procedures, especially in bypassing the Ministry of Law to give prior consent on the summary before it was presented for approval to the Cabinet. The question is: who allowed them to move the summary with such procedural flaws?

The aforesaid amendments in the SBP Act through the SBP Bill, if carried out, would surely be against the economic interests of Pakistan. No country in the world has given such autonomy, nay independence, to its central bank. We might rue the day we agreed to all this, especially to the curtailment of the development (growth) function of the SBP – as it will no longer be a priority area of the central bank.

This Bill would facilitate further deepening of the ongoing economic disaster, which would ultimately lead to the compromise of the sovereignty of the state.

The author, a UK fellow chartered accountant, is a former finance minister of Pakistan and former leader of opposition in the Senate of Pakistan