When the SBP Amendment Act was leaked from within SBP over WhatsApp, anyone who was anyone in the Econ sphere wrote an op-ed or tweeted about it, focusing on the clauses about the independence of SBP and the inflation targeting regime. The opinion space was overcrowded from both the pro and against crowd on the subject clauses. I had to find something unique to say if I wanted to stand out and not be repeating the same arguments.
Reading through the leaked document, I came across the sections about quasi-fiscal activities (QFA) which everyone had ignored, and I just latched on to them as if for dear life. Every chance I got, I wrote a post on the QFA clause to the extent that I think I have almost memorized them.
Subsequently, I received quite a few messages from a few well-wishers over WhatsApp that I am misunderstanding the clauses, getting it all wrong and what I am saying is not what is intended by those clauses. I replied, “it may or may not have been the intention, but the language of the Act makes it pretty clear. The refinancing isn't allowed anymore.”
The leaked document caused such a kerfuffle that the Ministry of Finance released a presentation to separate fact from fiction. The slide deck is still on the Ministry of Finance website. See below the slide from the deck about refinancing.
The aforementioned is blatantly false, and that too in writing. Below is the subject clause from the amended Act
From my earlier post:
It says:
SBP cannot undertake any quasi-fiscal operations or development finance activities. Development finance activities are defined as “any activity undertaken to promote any priority sector such as agriculture, SMEs, housing and other sectors”. Ironic that the very sectors mentioned in this definition are what you call underserved sectors such as housing, SMEs, agriculture, etc.
There you have it. In black and white. No two ways about it. SBP cannot undertake any activity to promote any priority sector. The restriction is not limited to quasi-fiscal activities (I don’t know if “quasi-fiscal” is defined in the Act anywhere). It clearly mentions “ANY ACTIVITY”.
Or as I put it in another substack post
As refinancing is nothing other than subsidized lending, what section 17 reportedly giveth in the form of accepting wider collateral for refinancing activities, Section 20 taketh away by explicitly forbidding quasi-fiscal operations and development finance activities.
I was dumbfounded that the finance ministry can straight up publish a white lie and that too on its website.
SBP also set up a conference to discuss the controversy surrounding the amendment. An astute journalist asked about the refinancing specifically. The SBP governor expanded on the reply.
Et tu Reza Baqir?
A few days ago, I tweeted a thread (edited for better readability)
There is a tension between fiscal and monetary authorities everywhere. Fiscal authorities are biased in favour of expansionary policies as it brings growth, employment, profits etc. It also improves their re-election chances. Monetary authorities are usually unelected technocrats and more concerned with inflation, financial stability etc.
Irony about aforementioned episode (if true) is that Abdul Hafeez Shaikh despite being a representative of fiscal authorities went to bat for monetary authorities: pushing the SBP Amendment act and sharing only selected information with PM and his cabinet.
I am fine with SBP’s independence and SBP not engaging in quasi fiscal activities if that is what SBP and the government wants. However, from the drafting of the amendment Act and subsequent populist measures of SBP (SBP just introduced another SME refinancing facility), it appears SBP itself isn’t clear what it wants.
As per the amendment, SBP wants to be primarily responsible for price stability yet SBP doesn’t have the capacity to control the type of inflation the country suffers from.
Moreover, the cloak and dagger act of surreptitiously drafting the act and not getting it vetted for language doesn’t place the sponsors of the act (Abdul Hafeez Sheikh and Ministry of Finance) in a good light.
Now that I think about it, when the brouhaha erupted over the amended Act, it was Ministry of Finance that made the presentation in its favour. As if MoF/Abdul Hafeez Shaikh agreed to it with IMF when negotiating the review.
Additional irony: the draft of the Act was leaked from within SBP i.e. as if elements within SBP weren’t in favour of own independence from the political government or may be they were pro-government and didn’t want another misadventure by ‘unaccountable’ Reza Baqir like his hot money experiment.
Trying to please IMF by keeping the PM and cabinet in the dark may have been what compelled the PM to show Abdul Hafeex Sheikh the door. With him gone, I think there is any one left to sponsor the Act. Reza Baqir has gone populist (hyping existing quasi-fiscal activities and introducing new ones) so I don’t think he will be pushing the Act anymore.
I am currently reading a book called “Secrets of the Temple” and it’s a fascinating account of politics within and surrounding Federal Reserve till 1985. I wish someone pens a small write up about politics surrounding the new Act ie who proposed it, who leaked it, why MoF was pushing for it etc.
Two days ago in his weekly column, Khurram Husain confirmed that Abdul Hafeez Shaikh had committed to IMF that refinance activities will be abolished.
The other table is a more familiar one: the IMF. The new finance minister, Shaukat Tarin, has made it clear that Pakistan will be seeking a renegotiation of the IMF programme that was restarted in April after a year-long hiatus. Specifically, he wants to wiggle out of the commitments given by his predecessor on power tariff hikes, revenue measures through the elimination of tax exemptions for corporates, curbs on spending and hikes in the petroleum development levy, and, quite possibly, abort the move to usher in greater central bank independence and wind up its refinance facilities.
The matter is finally settled that prohibiting SBP from engaging in QFAs was the intention of the Act, both Abdul Hafeez Shaikh and Reza Baqir were committed to it, and it was being done on the behest of IMF. What is left to confirm is if PM and his cabinet were kept in the dark, i.e., weren’t told the complete truth by RB and AHS. I had been saying from day 1 that the new SBP Act prohibits refinance activities, despite on record and in writing denials from the SBP governor and Ministry of Finance.
I just can't believe that this substack is free.
Today I am acting like a sell-side analyst who highlights his one call that he got right out of the three dozens he made about the stock market performance. As I explained in another thread:
When I used to day trade in Karachi Stock Exchange (before it became PSX), I used to get research reports from AKD, Elixir, JS, KASB etc. predicting ups and downs in individual stocks. There are around 20 business days in a month so just one brokerage house would send me 20 predictions a month. Multiply that by the number of brokerage houses churning out reports.
Occasionally one of the predictions of one of the brokerage house will come true. The next research report will say "jaisa k hum nay bataya tha 17 din pehlay k Lucky Cement ki price ooper jayegi to dekhain Lucky Cement ki price ooper chali gayi" (I am rephrasing it for effect).
I would be like "Abay lallu!!! or wo jo kal, parsoon, tarsoon, or 8 din pehlay or 19 din pehlay KASB Bank, Attock Cement, TRG or is jaisay kai or zaleel naam portfolio mein add karwaye keh 'aar ya paar keh kar' unn ka mein kia karoon"
I haven't gotten everything right in my substack, and I won't get everything right. As my twitter friend Shenaz had said, “I am not Nostradamus.”