An evaluation of the legal Autonomy of the State bank of Pakistan.

Abstract

Central bank independence refers to the freedom of monetary policymakers from direct political or governmental influence in the conduct of policy. In a developing country like Pakistan, where there is a pervasive market failure, which necessitates frequent government intervention, this freedom or independence is often reduced considerably and therefore deserves attention. Central bank independence has become one of the vital concepts in monetary theory and policy. It is widely believed that a high level of central bank independence with an explicit mission for the bank to curb inflation is an important institutional device to assure price stability. Although one could suggest alternative mechanisms to reach low rates of inflation, central bank independence is the one most often recommended. The basic message of this argument is that government suffers from an inflationary bias and as a result inflation is sub optimal. The rationale of central bank independence has received added force from the recent shift to inflation targeting. The government by its very nature is powerless to set such a target because inflation control entails restrictions on the flow of credit and rise in its cost, which in developing countries, in particular is, opposed by the vote-banks of the party in power or out of power In Pakistan, the issue of autonomy of State Bank of Pakistan was taken up in July 1993; prior to it the central bank had little autonomy as under the State Bank Act, 1956 the ministry of finance retained substantial powers to supervise the affairs of the Bank. The 1956 SBP Act did not explicitly mention the formulation and implementation of monetary policy and regulation and supervision of the banking system, which are commonly deemed to be the two core functions of the central bank. AN EVALUATION OF THE LEGAL AUTONOMY OF THE STATE BANK OF PAKISTAN The State Bank of Pakistan has made major strides in enhancing its supervisory capacity in recent years, bringing it broadly in line with international standards. There is a high degree of compliance with Basel Core Principles for Effective Banking Supervision. This paper is comprised of three parts. The first part defines the role of the State Bank of Pakistan and provides a theoretical assumption behind central bank independence. The second part forms the basis for the evaluation of the legal autonomy given to the State Bank of Pakistan over the years. The third gives special attention to the legal independence of the State Bank of Pakistan- the assessment of its independence and recommendation for its improvement.