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SBP: Challenges before new governor

"The new governor should also investigate unjustified rise in dollar price and figure out the reason of delayed action by concerned officials against cartels involved in making undue profits through speculative transactions"

The State Bank of Pakistan (SBP), like central banks of other countries, plays an important role in determination and implementation of monetary policy, formulation and implementation of exchange rate policy, holding, managing all foreign reserves of Pakistan. The governor of SBP acts as its chief executive officer and chairs its Executive Committee.  He ensures implementation of decisions taken and policies adopted by the Board of Directors, Executive Committee and Monetary Policy Committee. Unfortunately, this important position remained vacant for many months – after expiration of the term of Reza Baqir in May 2022. During this period, the open market witnessed unprecedented rise in the rate of US dollar that crossed the psychological barrier of Rs250 and policy rate jumped to 15%.

The financial experts on various occasions raised questions demanding action to stop speculative transactions by cartels in the forex market and for controlling dollar rate bringing it down to its realistic value. However, law enforcement agencies and SBP itself remained quiet until the dollar price in inter-bank crossed the mark of Rs240. Like other experts, we also mentioned in our article “Economy vs. Politics” [News on Sunday, Political Economy, July 31, 2022]: “…the central bank of the country should not be run by an acting governor who has failed to control speculative transactions undermining the strength of the rupee”.

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On August 3, 2022, the SBP through its official twitter account as well as a press release ERD/M&PRD/PR/01/2022-90 informed the public that it had increased monitoring of foreign exchange operations of exchange companies (ECs) and banks in view of recent volatility in exchange rate and started inspections and mystery shopping exercise to investigate customer’s apprehension. It further conveyed suspending operations of four branches of two ECs for violation of SBP regulations and also imposed monetary penalties on some in the recent past. In the same press release, the SBP committed to augment its enforcement actions in the light of findings of ongoing inspections and mystery shopping.

Now the question arises that why SBP waited so long to take action against those cartels that were making millions through speculative transactions. The unjustified rise in dollar price has cost billions to this poor nation benefitting a few.

Finally, the vacant position of the Governor SBP was filled on August, 19, 2022 when president of Pakistan accorded approval on the recommendation of prime minister under Article 48(1) of the Constitution of Pakistan and Section 11A(1) read with section 41(1) of the State Bank of Pakistan Act, 1956 (Amended 2022) through appointment of Jameel Ahmed for five years.

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According to details available on the website of SBP: “Mr. Jameel Ahmad was reappointed as deputy governor by the federal government on October 25, 2018 for a period of three years. He also served as deputy governor (Banking & FMRM) from April 11, 2017 to October 15, 2018. Mr. Jameel Ahmad’s illustrious career as an accomplished central banker spans over 30 years at various senior positions at the State Bank of Pakistan and the Saudi Central Bank (SAMA)”.

He now as governor of SBP is to perform extra responsibilities under the amended State Bank of Pakistan Act, 1956. The first challenges before the new SBP governor would be to bring down policy rate to promote a healthy business environment and control inflation which is now over 20%. Other than this as a new head of central bank, he should also investigate unjustified rise in dollar price and figure out the reason of delayed action by concerned officials against cartels involved in making undue profits through speculative transactions.

In addition, the new governor of SBP has to deal with multidimensional challenges of economy on both local and international fronts. He may realize that the recent wave of populist and non-pragmatic decisions have caused “over-heating” of economy leading to economic buffers causing external reserves to melt down at an alarming pace. Consequently, aggressive measures were taken for cooling down the economy but the same astonishingly triggered high inflation and policy rates which are impacting common man and business environment negatively. These splintered vitals of economy will take some time to settle, and the role of central bank is critical in addressing historic high inflation rates and weak local currency.

The immediate task in hand for Jameel Ahmad would be signing for resumption of Extended Funded Facility (EFF) from International Monetary Fund (IMF). Historically, IMF, SBP governor and finance minister have been joint signatories for Letter of Intent to IMF. Representing SBP, the current government has already taken numerous steps which were agreed by previous government with IMF in writing as deviating from or breaching the written terms can have serious fallouts for Pakistan.

The current government has already removed all economic landmines like unsustainable subsidies from petroleum and energy products. The budget document provides for new personal income tax rates, and imposition of petroleum levy. All these steps are continuation of commitments made by previous governor and finance minister, Reza Baqir and Shaukat Tarin respectively.

However, the incumbent finance minister, Miftah Ismail announced multiple restrictive measures to halt the pressure on foreign exchange reserves. The major step he took was to ban import of luxury items but conditions of SBP for approval and fixing the value of opening letters of credit made import of necessary items including medicines, complicated. Businesses have suffered huge losses while the country witnessed shortage of life saving drugs. Moreover, this step also violated commitment highlighted in the IMF staff report under the heading “Other Continuous Performance Criteria”. The report states that during the program period Pakistan will not:

  1. impose or intensify restrictions on the making of payments and transfers for current international transactions;
  2. introduce or modify multiple currency practices (MCPs) excluding though MPCs arising from the introduction and/or modifications of the multiple-price foreign exchange auction system operating in line with IMF staff advice with the objective of supporting flexible market-determined exchange rate;
  3. conclude bilateral payment agreements that are inconsistent with Article VIII of IMF Articles of Agreement; and
  4. impose or intensify import restrictions for balance of payments purposes

However, despite these commitments, the incumbent finance minister in open violation not only imposed ban to manage balance of payments but also created survival issues for importers. Though IMF did convey its reservation regarding import ban, now ahead of the IMF board meeting, he misstated and tried to portray it is a new condition of IMF for reinstatement of EFF. However, it was actually a violation of existing commitment of agreement between Pakistan and IMF signed in February 2022.

Though the government has lifted import restrictions, but in turn has imposed heavy regulatory duties etc. on imported goods. Apparently, this is being linked to compliance with IMF requirements which are true but apparently, government is struggling to collect revenue by imposition of heavy duties and taxes on imported goods hoping to meet their annual revenue targets which seem difficult due to expected economic slowdown.

Similarly, the recent hike in fuel prices has added additional burden on the life of struggling families. The finance minister linked this increase to purchases made by Pakistan State Oil. If this was the case then keeping in view the current decline in international oil prices and then recent stability of Pak rupee against the dollar, the government could easily offset inventory losses by maintaining the price of petroleum products for a few weeks without putting additional burden on the people and businesses. However, it appears that the present government is trying to run the country like a private enterprise, with the aim of generating profit but hardly caring about its citizens. This policy of extracting maximum from the public at large already facing survival issues, without implementing reforms to address fiscal gaps will cost heavily to the country in the long run.

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Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

The recent publication, coauthored by these writes with Huzaima Bukhari, is:

Pakistan Tackling FATF: Challenges & Solutions

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