KARACHI: International Monetary Fund (IMF) has advised State Bank of Pakistan (SBP) to tightening its monetary policy, as the current decline in inflation rate could be a temporary phase. Besides IMF asked SBP to become autonomous in taking decisions including improving policymaking.
According to the report, prepared by IMF’s staff led by its Washington-based Mission Chief to Islamabad Jeffrey Franks, Fund’s staff in a meeting with Pakistan authorities stressed a tight monetary stance would be remain important to help accumulate reserves and to contain inflationary pressures.
Impressed by the recent decline in inflation, the Pakistani authorities temporarily paused policy rate hikes, report said. IMF’s staff mentioned the recent decline in inflation could be temporary due to the fall in food prices and stressed monetary policy should be guided by a forward looking strategy of anchoring expectations. Staff argued further tightening of monetary policy, in addition to helping contain inflationary pressures should help SBP in its goal of building reserves, preventing dollarisation, and reducing capital flight, report added.
While the Pakistani authorities agreed the SBP should be vigilant for any sign or inflationary pressure while gauging monetary policy to help attract capital inflows to build reserves.
IMF reiterated enhanced central bank independence would improve monetary policymaking. In this regard SBP informed IMF draft amendments to the SBP law prepared by the central bank were under review by staff.
SBP reasoned due to recent resignation of the SBP governor and delays in preparing the draft amendments, the authorities are now expected to submit the amendments to the Parliament by end-March 2014 for enactment by end-June 2014 (structural benchmark). The law will strengthen the autonomy of the SBP, through full operational independence in the pursuit of price stability as the SBP’s primary objective, and an enhanced governance structure including strong internal controls, said the report.
In line with findings of the recent safeguard assessment mission, the amendments will also empower the SBP as the sole owner and manager of foreign exchange reserves, establish an Executive Board with defined executive powers, remove government representatives from the Central Bank Board and eliminate provisions that give government the authority to direct certain SBP activities, report added.
Moreover, the amendments will strengthen the personal autonomy of Board members and the financial autonomy of the SBP. The SBP will establish a Board Committee to centralise and oversee risk management activities across the bank by end-June 2014. Lastly, the SBP is moving forward with approving a plan to fully implement International Financial Reporting Standards (IFRS) as its financial reporting framework by end-June 2014.
SBP maintained the monetary policy rate unchanged at 10 percent in latest Monetary Policy Statement (MPS) for the next two months as the SBP said in recent MPS all major economic indicators moved in the desired direction over the past few months. Year-on-year inflation came down to 7.9 percent in February after month-on-month deceleration in inflation in two of the last three-month. The Consumer Price Index (CPI) decreased from 10.9 percent in November to 9.2 percent in December, 7.91 percent in January and 7.93 percent in February.
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