ISLAMABAD: Pakistan’s top economic experts are of the view that prohibition on the government’s borrowing from the central bank under the State Bank of Pakistan (SBP) Amendment Bill 2021 will create practical difficulties.
However, they said the bill is a step in the right direction because the SBP should have full independence in the formation of monetary policy and exchange rate adjustments to avoid economic losses.
Noted economist Dr. Ashfaque Hasan Khan told WealthPK in an interview that lawmakers should play their role in improvement of the bill. “Our country is being run on deficits due to a big gap between revenue and expenditure.
We collect less revenue than our expenditure. So, we are in deficit every month. In these circumstances, if the government will not be able to borrow from the SBP then it will be forced to borrow from the commercial banks.
Due to this factor, commercial banks will not lend to the private sector which will suffer as a consequence,” he said.
However, Dr. Sajid Amin Javed, Chief of the Policy Lab from Sustainable Development Institute (SDPI), told WealthPK that the bill is a step in the right direction but pushing it through legislation under the pressure of IMF conditions will distort its effectiveness.
“It will hurt the credibility of the central bank and monetary policy further. Therefore, a broad-based debate on the bill is required,” he said.
He added that SBP should be free from any political influence and it should have full independence in the formation of monetary policy and exchange rate adjustments because the government’s intervention causes economic losses.
The government has successfully managed to get the bill passed from the National Assembly. The bill now will be taken up by the Senate of Pakistan for further consideration before its final vote.
According to the contents of the bill, the SBP shall not extend any direct credits to or guarantee any obligations of the government, or any government-owned entity or any other public entity. The SBP shall not purchase securities issued by the government or, any government-owned entity or any other public entity on the primary market.
While highlighting the potential impacts of the bill, senior economist Dr. Kaiser Bengali said in a statement that after these amendments, banks (mostly foreign) will make windfall profits, government debt servicing will be further burdened by expensive private loans and people will be further crushed by inflation and unemployment.
The Ministry of Finance in its brief on the bill said that the amendments being proposed are in line with international best practices and also take into account the ground realities in Pakistan.
It said that by facilitating domestic economic stability, the amendments will help support sustainable growth and avoid repeated booms and busts that have characterised Pakistan’s past and led to painful consequences in terms of higher inflation, higher poverty and slow growth. Overall, the amendments balance the provision of necessary operational and financial autonomy to the bank with new mechanisms for enhancing transparency and strengthening accountability.
The brief obtained by WealthPK highlighted that the government borrowing from the central bank can lead to inflation and balance of payments difficulties. In Pakistan, recourse to such borrowing has also contributed to lack of fiscal discipline, low revenue generation in the form of one of the lowest tax-to-GDP ratios in the world, repeated booms and busts and the need for repeated IMF assistance.
When the government borrows from the central bank, it is equivalent to printing money. Simply printing money does not create more real resources in the economy.
All that happens is that more money ends up chasing the same number of goods, hence leading to an increase in prices.
To curb these harmful tendencies, most countries have included legal provisions to limit government borrowing from the central bank. -INP
