The key features of the SBP Autonomy Independent Bill 2021 are: (1) policy and institutional autonomy, which implies that the Bank will determine and implement monetary and exchange rate policies, manage currency and international reserves of Pakistan, and carry out these functions free from the influence of the Ministry of Finance yet under the overall target set by the federal government; (2) primary objective of SBP is to maintain inflation and achieve government’s set target; (3) it will be prohibited to lend money to the government for budgetary needs and or invest in government securities rolled out in primary markets; (4) SBP will submit performance report to the parliament and; (5) Bank’s employees are protected against any action in a court of law.

The policy autonomy of SBP will help in better management of exchange rate which has been historically kept overvalued. An estimate by PIDE (2020), suggests that the country has lost more than $100 billion of foreign exchange reserves since the inception of the country to fix the exchange rate and keep the currency overvalued. The autonomy of SBP will improve soundness of money, which means currency will not be prone to artificial controls, sudden shocks, and frequent erosion in purchasing power. The PTI government has effectively taken this government already in 2018.

The main reason for continuous dependence on bail-out packages is current account deficit however, this is a symptom, and not the cause itself. The cause is a historical failure of successive governments to reform and lack of clear thinking. We have evolved our taxation system around exemptions instead of a low-rate and uniform system. We have created anti-export biases in our trade policy. These problems have led to fiscal and current account deficits which continue to force governments to seek bail-out. An external limit on borrowing will hopefully increase the pressure on the governments to reform.

Currently, the country is experiencing continuously soaring commodity prices and a drop in the purchasing power of the masses, more felt by the lower income tier. The autonomy will equip SBP to manage inflation in correspondence to the government’s set target in the medium and long term through the use of monetary policy tools, most commonly the interest rate. The real interest rate in the country has been negative for quite some time to restrict the cost of borrowing and promote growth, which delayed the required interest rate hike and elongated the inflationary pressures.

It needs to be highlighted that the monetary policy tools will not completely resolve the issue of inflation as it only addresses the demand side factors. Whereas, the supply side issues require fiscal tools as country has a significant proportion of undocumented economy, which has no access to formal financial credit.

The inability of successive governments to control or reduce wasteful expenditures and its failure for wide ranging taxation reforms have led to continuous borrowing from SBP though it has been stopped in last couple of years. The Autonomy Bill envisages the prohibition on the government to seek SBP lending or investment in government securities in primary markets. This will force the government to cut unnecessary expenditures to achieve fiscal discipline. The government can continue to borrow money from commercial banks by selling securities, but it will further crowd out the private sector.

In our view, this bill is largely a step in the right direction as it will help in right sizing the government and achieving monetary stability but some amendments to the current bill are necessary to restore institutional check and balance. This can be ensured by giving a right to vote to the Secretary Finance who will be a member of the Board of Directors. Further, blanket indemnification of SBP employees against a court of law should be reconsidered in the interest of establishing rule of law. There should be a term limit for the governor and the current option of renewal for another five years should be withdrawn. The fact that the appointment of the governor will be made by the President in consultation with the federal government is a re-assuring feature of the bill and similar powers can be provided to the Parliament for removal of the governor in case of failure to achieve targets.