The first attempt to accord autonomy to SBP was made through an Ordinance promulgated in October 1993 by the interim government of Moeen Qureshi. When the 2nd Benazir Bhutto government took office on 18 October 1993, she was initially reluctant to endorse such a major reform, which on the face seemed like ceding control of a key institution of the government. Also, she had to defend this reform in the Parliament, where there were many detractors of such a reform. However, her close advisors were able to convince her that the reform was in line with the evolving international best practices relating to functioning of the central banks, and would not impair the ability of government to implement its economic agenda. In fact, it was this line of argument that persuaded her to even endorse the Extended Structural Adjustment Facility (ESAF) program which was actually negotiated by the Interim Government. Curiously, she had shown a similar gesture in good faith in the past when she endorsed the Structural Adjustment Program (SAF) which was negotiated by Dr Mehboobul Haq as interim Finance Minister in October 1988, only a month before she would become Prime Minister for the first time.
Apart from certain provisions relating to the security of the tenure of the Governor and Board of Directors, the main purpose of the amendments was to limit government credit and, in so doing, to ensure that there was proper coordination with other policies of the Government. Two Sections, 9A and 9B, were inserted in the Act. We first focus on Section 9A.
In the 1993 Ordinance, Section-9A authorized SBP, with a view to secure monetary stability, inter-alia, (a) to regulate and supervise monetary and credit system: provided in so regulating the monetary and credit system the central bank shall keep in view the national policy objectives of the Federal Government; (b) determine the limit of credit to be extended to the Federal and Provincial Governments; (c) tender advice to the Federal Government on monetary policy and its interaction with fiscal and exchange rate policies.
When the SBP (Amendment) Act, 1994, was passed in February 1994, the above section was amended, which slightly diluted the power of the Board by qualifying, eg, consultation with the Federal Government in respect of setting limits to Federal and Provincial Governments. But then an extraordinary authority was given to the Governor, which read: Provided further that the Governor may, in an emergency which in his opinion requires immediate action, take measures under this clause as may be necessary in the circumstances and shall, in the next meeting of the Central Board, report to it for approval of such actions.
To appreciate the nature of powers given to the Central Bank, we need to recall the monetary system prevailing at the time. The monetary policy as we understand today was not fashioned at the time. Despite the commencement of the system of government borrowing through public auction in March 1991, the size of such borrowings was limited as banks and DFIs remained in the public sector (with scarce liquidity) and much of the investment in such securities was done by foreign banks, who used it as a scheme of arbitrage. These banks would place foreign currency deposits (on guaranteed exchange rate) with the central bank and get equivalent rupees which were then invested in auctioned securities, earning significant margins in the process. Indeed, there was rampant dollarization, which unfortunately culminated in the freezing of foreign currency accounts (FCAs) in May 1998. The move toward variable interest rates had barely started and KIBOR was yet to be established. In fact, the system of sectoral allocation of credit through a credit plan was very much in vogue.
Another important feature of the monetary system was the continued presence of a number of commercial banks in the public sector, despite privatization of MCB and ABL (which was in fact over-turned). The Pakistan Banking Council, established in the aftermath of banks' nationalization, acted as a drag on the authority and supervisory role of the central bank, and later was used as a channel for political influence in the working of the commercial banks. In fact, from the outset, the PBC had eclipsed the role of the central bank as the leaders of the banks looked for guidance more toward PBC and the ministry of finance than the central bank.
Under the circumstances, the autonomy first amounted to the security of the tenure of the Governor (first governor got two terms). Second, it established central bank's authority over the supervision and regulation of monetary and credit system in the country. It may not have completely addressed the problems emanating from PBC, but it gave the SBP preeminence in taking measures needed to secure monetary stability. Third, it sent a powerful signal for the future course of changes, since public sector banks were on the verge of bankruptcy and stood no chance of survival under continued government ownership. Even then, SBP supervision was critical to keep them going and to ward-off further erosion in their assets. Finally, the emergency powers conferred on the Governor were fairly extensive and were so used by successive governors especially during the early phase of the evolution of current monetary policy framework.
A further amendment in the SBP Act together with concomitant changes in Banks' (Nationalization) Act 1974 and Banking Companies Ordinance 1962 comprehensively established the leadership of the central bank in the conduct of monetary and credit system. Under the SBP (Amendment) Act 1997, its autonomy was further strengthened by allowing it to set limit on credit to governments while excess needs were to be met through auction of debt. Furthermore, no government agency would issue directives to public sector banks inconsistent with the directives and order issued by the central bank. On the other hand, amendments in the Banks (Nationalization) Act 1974 abolished the PBC, gave autonomy to the Boards of the nationalized banks and DFIs to exercise full control over the policies of such institutions and made it mandatory on the Federal Government to make appointments of their chief executives from the list of the professional bankers maintained for this purpose by the central bank. Amendment in Banking Companies Ordinance prohibited disruptive union activities in the banks, which had become a norm and led to serious disciplinary issues.
A new regulatory regime was thus evolved, ready to embrace a more challenging monetary system that would be functional with the onset of the new century.
[To be continued]
(The author is a former finance secretary) [email protected]