Pakistan passes IMF-backed law for central bank autonomy

A logo of the State Bank of Pakistan (SBP) is pictured on a reception desk at the head office in Karachi, Pakistan Jul 16, 2019. REUTERS/Akhtar Soomro/File
Pakistan's upper house of parliament put the seal on Friday on a law backed by the International Monetary Fund (IMF) to give the central bank more independence in decision-making.

The new legislation, passed by 43-42 votes and with immediate effect, was among the most important of conditions by the IMF for revival of a stalled $6 billion funding programme.

The lower house had earlier this month also passed the law, which the opposition cast as a surrender to the IMF.

The bill gives the bank independent powers to control price stability and monetary policy, plus guaranteed tenure for its governor. It also stops the government borrowing from the bank.

Prime Minister Imran Khan and his finance team have accused previous governments of interfering in the bank's operations such as propping up the rupee artificially to the detriment of imports.

The IMF review board is next meeting on Feb. 2 to discuss a due tranche of $1 billion, which was delayed twice at Pakistan's request pending the legislation.

To meet its conditions, Pakistan has also passed a mid-year budget to end exemptions on sales tax as part of fiscal tightening to raise 343 billion rupees ($1.93 billion) for the 2021-22 financial year.

PRICE PRESSURE

Opposition parties view the mid-year budget and the central bank law as a capitulation to the IMF, saying it will hit Pakistanis hard on top of inflation that rose to 12.3% Y/Y in Dec, 2021.

"It is yet another defeat to the opposition," Information Minister Fawad Chaudhry said after the bill was passed.

The opposition has a majority in the senate but had 10 members missing. Opposition leaders have alleged anonymous calls putting pressure on legislators to note vote against such critical legislations, but the government denies that.

Surging food and energy prices have put Khan under increasing pressure, especially from his middle-classes support base.

Foreign inflows are critical to Pakistan's economy given that its external account deficit has widened on the back of soaring global commodity prices, particularly oil which makes up about a third of the country's payments.

Foreign exchange reserves are also a key buffer to stabilise the rupee. Pakistan only last year adopted a market-based exchange rate, resulting in a sharp depreciation of the rupee.

Pakistan's central bank reserves fell over $800 million in the last week to stand at just over $16 billion.

Pakistan earlier this week raised $1 billion with a 7-year sukuk, offering an interest rate of 7.95%, the highest return the South Asian nation has ever paid on an Islamic bond.