Another Folly: The State Bank of Pakistan Amendment Act 2021

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by Mian F. Hameed     6 January 2022

Last year, Yule came to Pakistan as amendment to the State Bank of Pakistan Act, 1956. The bill, “SBP Amendment Act 2021,” has passed in Pakistan’s parliament to make SBP an autonomous body. This article addresses certain sections of the bill, and what principal relationship Pakistan will have with the State Bank of Pakistan (SBP).

If this bill becomes the law, the world will witness its first truly independent central bank. A true independent central bank is a myth. In the developed countries, the independent central banks “operate with a fair degree of independence from the government.” Shinzo Abe, the elected Prime Minister was able to influence the Bank of Japan (BOJ) to raise inflation rate from 1 percent to 2 percent to fulfill his election campaign promise—”unlimited easing.” –Source: Federal Reserve Bank of St. Louis, 2013.

The bill has passed with an undemocratic twist. Pakistani media reports, the Prime Minister Office (PMO) has raised reservations about the bill, and requested taking out certain sections. Yet it was strangely passed in its entirety by PM Khan’s majority in the parliament. The parliamentarians violate the Nolan principles—simply put, is the dishonest polity; now have shown the power of governance!

Not long ago, I wrote three-part series on how to improve the economic life of the people of Pakistan. The series began with a narrative that the conventional wisdom has gotten Pakistan wrong, and that the economic models of the West if placed in Pakistan will not work.

Notwithstanding that narrative, the select Pakistanis have once again opted for the mandates of the IMF to implement the Western economic norms. The many Pakistanis do not realize, not only the poor and the developing countries should heed caution to behaving through the developed countries norms that are like super power countries—a different species, but the amendment has unsettling clauses.

Pakistan, hold-on to your wallets.  The bill crafter’s proposal is a deficit generating workflow, which proposes strong transparency through audits, allocating “sufficient financial resources […] One hundred million rupees,” and reasoning for providing strong accountability, is a call out from Ali Baba and the Forty Thieves with a supporting logic, I am uncertain if our 8th graders would be willing to own.

The proponents of the bill to grant the SBP autonomy relies on reason that the amendment aligns with the international norms. This premise has an essential error. Those independent central banks usually belong to the developed countries and not the developing countries that do not have or lack working institutions, and do not have clout at their disposal to hedge against unfavorable outcomes.

Pakistan has no institutions to mimic the Western playbook that can help economic policy strive for the amendment’s proposed objective, “Domestic price stability.” Furthermore, the international norm, low inflation and its premise that the amendment calls out as reasons for the proposed amendment is technically misplaced. The domestic price stability objective will not be met.

Nonetheless, the amendment begins with giving “background” as justification of the SBP autonomy bill. One aspect of the background states, “Countries with an independent and accountable central bank have lower inflations rates…” Please spares us! I would rephrase the bill crafter’s premise to: Those central banks with low inflation rates, as luck would have it, happen to be independent central banks that benefited from other factors.

Their low rate of inflation arguably comes from other factors: Globalization efficiency—the China factor, weakening trade unions, de-industrialization, the record high unemployment of the 1970s and 1980s. –Source: Adam Tooze, FP, May 2020. And the market crashes.

In fact, the central banks have failed to reach the expected 2 percent inflation rate norm desired as target from the independent central banks. The central banks now worry from the uncertainty in the scientific community about Omicron, and perhaps inflation could stay longer with uncertain environment over a longer horizon.

As seen, if the premise is faulty, i.e., the low inflation rates are caused by the central banks because they are independent, then the remainder of the reasoning in the bill and the supporting proposed sections by logic are faulty. Their reasoning amplifies delusional syllogism and the outcome then must not be correct.

Another reason provided for the bill is to “strengthen accountability,” which is a myth.  The only accountability to the government is the SBP providing a yearend report to the parliament. The spirits of the amendment make SBP’s board and the staff accountable to no one, is seen in the language that bars agencies like, (NAB, FIA or provincial agencies) from investigating past or present SBP board members and staff. Additionally, the bill gives them immunity from law suits if these individuals do not act in “bad faith” or “mala fide intent.”

There are quite a few troublesome aspects in the bill. To have an autonomous central bank per the international norms, perhaps one can justify if the Pakistani atmosphere is ripe for the purpose. But to make it unaccountable to anyone and with immunity from the law is a head scratching event.

The Reserve Bank of Australia is an autonomous body, but is accountable to the parliament and the people. The Fed in flavor is above the law, because the system cannot hold them to account for many reasons. One is, they will take the volumes written by authors up the steps of Capital Hill to justify their acts.

Traditionally, the American system don’t hold people in the financial system to account. Professor Chomsky is on record to peek into the U.S. system’s immunity from the law. Ben Bernanke and team at the Wall Street during the 2008 crash, instead the system serving them subpoenas, were rewarded. Bernanke was made the Fed Chair by the Obama administration.

Proving bad faith before the court of law is practically impossible. Autonomy means, do whatever it takes. We can draw lessons from the ongoing litigations that started around 2015 between the European Central Bank (ECB) and the usual plaintiff, Germany. The German Constitutional Court’s litigation arose from ECB’s flagship unlimited bond buying quantities, which Germany has difficulty prevailing upon in the European Court of Justice (ECJ).

Granting immunity from the law even to the past SBP officials has legal implication for a recourse, should Pakistan choose to go after those that help generated Pakistan’s odious debt. There is sufficient scholarship in the West to support Pakistan’s odious debt cause at the Hague.

Given the fractured justice system of Pakistan, in the event of an odd chance that the SBP board members end up in litigation, what are the odds they will be liable.  Learn from Pakistan’s convicted people like the former Prime Minister Nawaz Sharif, that has no immunity from the law, was able to influence the system by faking medical records. Sharif has managed to land under the protection of the U.K. government.

The current SBP governor Mr. Baqir, in Pakistan is seen as having questionable loyalty to Pakistan. Even the absconder, the former Finance Minister Ishaq Dar, had the audacity to dub Mr. Raza Baqir as the IMF’s “own man” in his article regarding this bill. –The News. As it stands, Mr. Baqir’s conflict of interest concerns in Pakistan are ripe.

The amendment also bars the government of Pakistan (GOP) from borrowing funds from the SBP—a mind boggling clause designed to potentially curb inflation. Therefore, the GOP will have to go to the primary or the secondary markets to borrow. Imagine GOP borrowing from the new or the existing banks, will spin a super class of financial tycoons giving Pakistan the means to an ever-widening gap between the rich and the poor.

The poor and the masses will get taxed from money creation. The amendment will spark generating loans to the GOP at a premium and in a velocity never seen. The practice of loaning money at a premium cost essentially equates to private organizations acquiring the capacity to exponentially tax the people.

There are substantial risks associated with creating money and loaning it to the GOP from orchestrated outcomes, which can be means to manipulated or unmanipulated crises. What will Pakistan do when those bonds sold to create money are cashed in bulk with limited or no buyers? Someone will have to obey to the demands of the bond holders then—wouldn’t they?

In the case of China holding the U.S. treasury bonds, China cannot weaponize, (dump) the U.S. Treasury bonds. China is tied into Wall Street and profits from the U.S. economy. Additionally, the U.S. Treasury has means to react. Chinese are not foolish to trigger a ripple effect in the U.S. consumer markets.

The noose is getting tighter.  The SBP Amendment 2021, will raise concerns that of what Germany thinks of ECB—a “European superstate,” which is an “opaque technocratic agency arrogating to itself powers that properly belong to national parliaments.” –Source: Id. Pakistan will have to obey the mandates of a superstate—IMF.

The effects of amendment to the 1956 Act, to give autonomy to the SBP would be devastating to Pakistan. The SBP autonomy bill is similar to “a self-governing community of rebels that demands autonomy from Spain.”

The State of Pakistan will have no principal relationship with the State Bank of Pakistan. Pakistan may very well allow another amendment to the 1956 Act, and change SBP’s name to the Central Bank. This is not a national bill, but is rather a “banker’s bill;” this very phrase was orated on the floor of the U.S. Congress when the creation of the Federal Reserve Bank was imposed upon the people of the United States.