We've discussed if the bank of Pakistan is independent. Does autonomous structuring idea of state bank is a reality? Does the loans and the increasing debt in Pakistan sheds the light upon the issue of the independence of SBP?

1. MONEY and BANKING
How independent is state bank of Pakistan
5/6/2018
Asad Ali (1611224)
Aimen Ashraf (1611219)
Syed Mohammad Farhan (1611253)
Anoosha Dawira (1611221)

2. Introduction:
The topic regarding the autonomy of the ‘State Bank of Pakistan’ remains debatable. The high
rates of inflation and increasing money supply by the SBP has led to the introduction of this
debate.
The advisor of finance and the SBP governor believe that it is desirable to increase the control
of the State Bank. This statement was concluded at a recent standby arrangement with IMF.
However, this topic has led to an issue i.e. whether an increase in the banks control would
result in changes of laws or changes in attitudes and practices of the bank.
However, the autonomy of SBP is not necessarily determined by change in laws, enhancement
can also be done by the usage of existing laws that tend to focus on SBP autonomy. Hence, SBP,
IMF and the government should stop working on changing laws and instead focus on existing
laws to promote the national, economic and financial objectives relating to autonomy.
Situation before 1993 when state bank was not autonomous and why was there
a need for an autonomous SBP (state bank of Pakistan).
Prior to 1993, SBP was not at all autonomous in any sense of word. There have been a number
of successive developments since the establishment of SBP in 1948 as central monetary
authority had relegated it to the status of an attached department of the ministry of finance.
These developments comprises nationalization of the banking system 1947 and creation of
Pakistan Banking Council, Likewise authority similar to that of SBP succession of governors after
Mr. Zahid Husain who belonged to federal bureaucracy, having background or training in
monetary economics or any kind of awareness with the conceptual separation of functions of
central bank from the government, moreover the provisions in the original State Bank of
Pakistan Act
(1956) for the dominance of federal government (ministry of finance) in matters falling in the
jurisdiction of a central bank, increase in trade union activities and their interference with the

3. management of banks, politicization of the banking system to promote vested interest, and
working procedures within which the ministry of finance began to treat SBP as another
subordinate entity.
Ministry of finance appointed the rubber stamp SBP board of directors without any regard to
required expertise, was of no consequence, and all major board decisions, about staffing,
lending and regulatory policies, or analytical contents of the SBP Annual Report, were subject to
approval by the ministry of finance.
The accumulative impact of these factors and developments was that by early 1990s, SBP was
utterly marginalized, monetary policy became submissive to financing requirements of the
public sector, government-directed and subsidized loaning accounted for a large part of private
sector credit, political, bureaucratic and union interference within the banking business became
rampant, direction of banking fragmented became terribly weak, loan portfolio became heavily
infected, quality of services took a dive, and therefore the banking industry was on the verge of
collapse.
The ministry of finance, with clear conflict of interest between government’s monetary desires
and sound banking system, was effectively creating selections regarding disposal policy and
banking practices either directly or through directives to Islamic Republic of Pakistan Banking
Council and SBP. As time passed, SBP got used to acting as the most compliant servant of the
ministry of finance, and few of the governors that asserted independence in baking supervision
and monetary policy were summarily removed. It's within the above context,
and quick deteriorating economic and monetary conditions, that a movement was started in
1993 to introduce legal reforms to give independence and traditional central banking authority
to SBP. This effort was completed in many phases by May 1997 with the incorporation of
comprehensive reform within the SBP Act, Pakistan Banking Companies Ordinance and
enactment of some additional laws.
The administrative autonomy of SBP secured within the first round of legislative changes in
1993 has not been questioned, and has been totally exercised then. The administrative and

4. management decisions of SBP board become final, not requiring any government approval
which was not the case before.
Moreover, the governor and the board once appointed could not be removed before the
termination of their tenure apart from misconduct proven by the government. All monetary
instruments were restored to SBP to be utilized by the board without prior approval of the
government within the conduct of monetary policy. The board was to publish an independent
annual report on the state of the economy without government interference. The government
was required to consult the SBP board to determine its borrowing limits from the banking
industry and sanctioning and supervision of the banking system was given back to SBP.
These were in themselves big steps however not enough to separate monetary from fiscal
policy and to permit SBP to conduct independent monetary and banking regulation policies.
Consequently the weaknesses and anomalies that weren’t addressed within the 1993 legislative
reforms, including but not limited to continuation of Pakistan Banking Council (PBC) and
authority of the government to determine the borrowing from banking system, were removed
in 1997, and interference of the government in supervision of the banking system was lawfully
prohibited.
1993-1997 state bank act, what is the act? The problems faced in creating it.
The situation was so bad that ministry of finance was making all the decisions either by itself or
by directing the orders to Pakistan banking council or state bank of Pakistan. The SBP was under
the command of MOF and if any governor tried to gain its independence, they were either
suspended or removed. Now was the time to make a move and start a reform if SBP wants its
independence and they certainly did. In 1993, a movement was started to introduce legal
reforms to give the independence and authority to State Bank of Pakistan and by May 1997,
this effort was completed. The legislative changes that were made during 1993-1997 gave SBP
the following autonomies:

5. • Administrative autonomy
• Autonomy in the formulation and implementation of monetary policy.
• Autonomy in the regulation and control of the banking system.
The administrative autonomy hasn’t been questioned yet and still SBP has it. It means all the
management decisions of SBP are final, no government approval is required. The governor is
now appointed by SBP itself and it can’t be changed until there is any misconduct proven. The
SBP can conduct monetary policy without the approval from the government. The supervision
of banking system was given back to SBP and government has to consult with SBP to determine
its borrowing limits. By 1997, the PBC was removed and the interference of government in
banking system was prohibited. The SBP board was required to send a separate quarterly
report to the parliament. Government was no longer allowed to give directions to the banking
system if it contradicts the policies of the SBP. That is how the autonomy of SBP was
strengthened and powers were given to its board of directors.
A viable and ceaseless requirement of all the new lawful arrangements would have made SBP a
really autonomous national bank at this point and prompted the production of its own non-
political institutional identity exemplifying polished methodology, fitness and objectivity. The
way that the outcomes have missed the mark regarding the goal of the law, and SBP has not
shown genuine independence in the current past in its regions of locale, gives one motivation
to delay and assess the hindering variables with a view to proposing measures to evacuate
them for enduring advancement.
Self-governance by and by at the season of administrative changes, it was perceived that the
implementation of new laws may end up being a more overwhelming assignment than their
enactment. Old request is hard to disassemble practically speaking even with the adjustments
in laws, and new customs and practices set aside opportunity to strike roots. In any case, amid
1997-99, a promising start was made to make conclusive moves toward that path and to
declare practically speaking autonomy of SBP that had been cherished in its contract through
administrative changes amid 1993-1997.

6. Specifically, in the matter of government obtaining from the saving money framework, SBP
started to take after area 9A and 9B of the State Bank Act and built up an institutional strategy
and an investigative structure to decide the sheltered furthest reaches of financial development
and of government acquiring from the saving money framework that were reliable with
national monetary goals of development, expansion and adjust of installment.
With the start of requirement of new laws on the above lines the managing an account
framework and money related circumstance started to enhance however in the meantime,
personal stakes, including some administration quarters, were set up to brawl against SBP.
Nonetheless, SBP adhered to its approach of authorizing the laws amid the underlying time
frame, raising expectations that continuation of the authorization exertion in the resulting
years could dig in the self-sufficiency as much by and by as it was in laws.
Situation regarding state bank of Pakistan autonomy after military takeover in
1999.
After the military takeover of the administration in 1999 there was a genuine misfortune to
advance in STATE BANK OF PAKISTAN's self-governance in actuality. The state bank of Pakistan
faltered upheld to the customary practices of pleasing whatever acquiring from the saving
money framework was managed by the legislature in its financial plan. The administration was
likewise permitted to obtain from STATE BANK OF PAKISTAN considerably bigger than the
planned amount either to back extra government consumption or supplant more costly
business banks obligation by less expensive borrowings from STATE BANK OF PAKISTAN.
Additionally privatizations proceeds continue which were for the most part used to resign
obligations were presently used to back government expenditure. The lawful arrangements of
area 9A, 9B of the altered state bank act were abused when government ordered credit ask for
start to be suited. The legislature was given a free hand to blow up the economy through
printing of notes and the keeping money part was urged to give modest credit to utilization in
the private area. Negative impacts of these practices stayed covered up for quite a long while
on account of inflow of remote trade, turn around inflow of assets in to Pakistan through the

7. keeping money framework after 9/11 fear monger assault in US, US AID and sale of assets to
outsiders. STATE BANK OF PAKISTAN turned into an energetic band together with the
government in deluding general society about Macro/Micro economic patterns and making an
inference of thriving. The state bank of Pakistan was given autonomy to give an investigation of
the macroeconomic patterns however the state bank of Pakistan neglected to evaluate the
fundamental macroeconomic patterns and rather turned into a partner in the cover up. In
addition the state bank surrendered the authority that was given to it to restrict governments
borrowing and to protect monitory stability. The arrangement of the governor and the board
between the president and the prime minister separately added to the confusion and
debilitating of state bank of Pakistan authority. Under area 9B of the state bank act the state
bank of Pakistan should hold quarterly gatherings of the fiscal and monetary coordination
board which it neglected to do as such which separated state bank of Pakistan from formulating
policies. Heedless borrowing from state bank of Pakistan by the government filled
hyperinflation, added to depletion of foreign exchange reserves and degrading of the rupee.
A few measures are important to reestablish to state bank of Pakistan its well-deserved
independence. Those measures are:
• State bank should demand the administration to hold general gatherings of fiscal and
monetary arrangement coordination board with focuses of inflation, reserve changes and
growth.
• State bank of Pakistan should decide and confine government borrowing both from state
bank of Pakistan and banking system keeping in mind the end goal to plan for its financial plan.
• Quarterly exercise ought to be attempted to survey adjust of inflation, growth and balance of
payment.
• The arrangement of the governor and the board ought to either be made by the president or
prime minster and the tenure ought to be for a non-inexhaustible time of five years.
• Ministry of finance ought to apply no managerial control on state bank of Pakistan. The
human temptation for concentration of power in one’s individual hands at the cost of the

8. institutions must be evaded in the larger interest of good governance.