Sovereignty lies with IMF : SBP Amendment — 3 : Dogmas and Presumptions
Question everything and don’t assume anything, especially when reviewed by a committee
My last post for the year. Still travelling so please forgive the typos and formatting. If you are receiving it over email, it might get clipped. Click on the title above to read it on the website.
"money is too important to be left to central bankers"
— Nobel prize winner Milton Friedman - 1962 essay on "Should there be an independent monetary authority?"
“I PICKED UP THE PHRASE “VERY SERIOUS PEOPLE” FROM DUNCAN BLACK, who blogs under the name Atrios. He used it, I think, to refer to all the influential people who were quite sure that invading Iraq was a good idea, because that’s what all the influential people were saying—and because it sounded like a tough-minded stance that was, well, serious. But Iraq was hardly the only example of the phenomenon.”
….
“So where were the economists in all this? Unfortunately, there will almost always be some economist somewhere, maybe even an economist who has done solid work in the past, who will tell Very Serious People what they want to hear. And what these economists say gets amplified out of all proportion to the amount of evidence or professional backing for their assertions.”
— Nobel prize winner Paul Krugman in Arguing with Zombies (2020)
“When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.”
— Nobel prize winner Paul Krugman, NYTimes, July 2010
And lastly,
"Central bankers and even some monetary economists talk knowledgeably of using high interest rates to control inflation, but I know of no evidence from even one economy linking these variables in a useful way..."
— Nobel Prize winner Robert Lucas - Nobel Prize Lecture (1995)
Those who cannot even get into corridors of IMF are today criticizing it
— Dr. Abdul Hafeez Sheikh as Advisor to PM on Finance and Revenue (an Econ PhD but not a Nobel laureate)
Majority of economists will die on the hill of controlling inflation through interest rates citing Volcker (‘79/‘80) episode. Robert Lucas (Nobel prize winning economist in his prize winning speech) disagrees and that too 15 years after the Volcker episode which implies he must have seen the data showing no relationship between interest rate and inflation.
The purpose the aforementioned quotes is to impress upon the readers that not to put economists on a pedestal or not take anything that is coming out of some economist’s mouth as gospel. As Nobel laureate Paul Krugman implied, economists have their prejudices and follow fads. And as Nobel laureate Robert Lucas stated, economists have been teaching and recommending stuff that isn’t backed by evidence for decades. And you shouldn’t really put much faith into someone who has walked in the corridors of IMF.
I will use this opportunity to replug the below meme one more time
Lastly,
“What section 17 giveth, section 20 taketh away”
— DMKM ie aap ka bhai (neither a Nobel prize winner nor a PhD Econ)
There was some fair criticism of my last post which I present below.
Yet earlier, our expert lawyer Farogh Nasim, well I presume he is an expert in constitutional matters if he is opining on such matters, called the aforementioned section unconstitutional
Sections of SBP amendment bill violate constitution, says Farogh Naseem
While briefing the International Monetary Fund officials via video link on Monday, he said the provision provides that the central bank would be consulted on any proposed legislation relatable to the SBP.
The legislative power has been conferred by the Constitution on the parliament, and the Constitution does not provide for any consultation with the SBP prior to passing of any legislation, he explained, adding the proposed section introduced a stipulation which was ultra vires of the Constitution.
Then there was this
There you have it. If Shaukat Tarin wasn’t lying, it appears Farogh Nasim was patently lying if three senior lawyers are saying something else.
The only lesson here is always question everything.
(I am grateful to god that as a finance person I get paid to read a lot of loan agreements and have the confidence to opine on legal matters).
There was this too
This is exactly what I am rallying against. Not to take off your thinking cap just because a bill has made it through some committees or presented by pedigreed technocrats.
The earlier version of this bill had a clause that was ultra vires to the constitution and yet the bill had already been rubber-stamped by the federal cabinet without reading.
The federal cabinet approved the SBP Bill on March 9, 2021 but without reading it.
The same cabinet approved a deal with Bahria Town that was presented in a sealed envelope. Can you believe this shit!!!?
TOWARDS the end of 2019, something unusual happened at a federal cabinet meeting in Islamabad. Special Assistant to the Prime Minister on Accountability Shahzad Akbar was allowed to present a ‘non-agenda item’; he had with him a sealed envelope that he said contained a non-disclosure agreement. It pertained to a multi-
million pound settlement that the UK-based National Crime Agency (NCA) had recently arrived at with property tycoon Malik Riaz. According to a source present at the meeting, “[Human Rights Minister] Shireen Mazari objected, saying, ‘What approval are we giving when we don’t even know its contents?’ We were told that if it is opened there are implications for national security and the UK government also has reservations”.
The bottom line:
never ever take off your thinking cap no matter how many committees a document is coming through!!
Enough with the background. Let me get this post over with. First something that I glossed over as I didn’t read after the first objective.
I don’t know if Uzair gets to read loan agreements but in my experience, a half decent lawyer wouldn’t allow such language in a loan agreement. And apparently this has been through legal departments of IMF, SBP, MoF and whoever advises federal cabinet on legal matters. In a loan agreement, if things go south, it’s the loan officer who gets the boot for not covering all the bases. The lawyer has already made bank with his billing when the loan agreement was signed.
Uzair is right. Subsection (3) of objective is laughable as it is pure fluff. It doesn’t mean anything. Reminds me of when we used to add needless verbosity in our undergraduate essays to achieve the minimum essay length.
Bottom line:
In new SBP bill, the objective is laughably incoherent
Clause 17A now reads
18. Amendments of section 17, Act XXXII! of 1956.- In the said Act, in section 17,—
(a) for clause (1A), the following shall be substituted, namely:—
“(1A) provide the refinance facility exclusively to the financial institutions falling under the supervisory jurisdiction of the Bank backed by such collateral and on such terms and conditions as may be determined by the Bank. This refinance shall not be provided to any person other than a financial institution. The Bank shall implement the refinance facility exclusively in pursuit of its mandate, without compromising its primary objective of price stability. The Bank shall not use the refinancing facility to directly or indirectly provide privileged access to funding to any financial institution or risk insurance of any specific sector.”
When the earlier version of SBP bill was leaked, while everyone was talking about independence of SBP, I zoned in on refinancing and said that the bill doesn’t allow refinancing which eventually reportedly SBP admitted in a press conference.
But the aforementioned doesn’t make everything right. When the original bill appeared I used to say,
What section 17 giveth, section 20 taketh away
Section 20 describes what activities are prohibited. As per the new bill
22. Amendment of section 20, Act XXXIII of 1956.- In the said Act, in section 20, after clause (5), the following new clause shall be inserted, namely: —
"(5A) undertake any quasi-fiscal operations or development finance activities".
The bill doesn’t describe what are quasi-fiscal operations. This is a big oversight. The clause is prohibiting something but it isn’t defined anywhere. Any half decent lawyer… anyway you get the drift. On page 80 of IMF’s Manual on Fiscal Transparency, this is how Quasi Fiscal Activities are defined.
Operations related to the financial system
Subsidized lending
Under-remunerated reserve requirements
Credit ceilings
Rescue operations
And what is refinancing if not subsidized lending. Hence, section 20 is prohibiting refinancing. If the committee or the drafting committee were doing an honest day’s work or if a loan officer (not even a lawyer) was reviewing it, the conflict could have been resolved in two ways:
Either explicitly defining quasi fiscal activities and not including subsidized lending or refinancing in it
Or making an exception in section 20 such as “all quasi fiscal activities are prohibited with the exception of activities mentioned in section 17A).
As I said earlier, this bill is an absolute shoddy piece of work. The technocrats at IMF, SBP and MoF assumed that no one will read the bill, no one will go to court over it so they dropped the ball on it. Pathetic level of professionalism. We were taking SBP Amendment bill here and Reza is a lawyer.
Still not done with section 17 and 20. The bill fortunately defines development finance activities which section 20 prohibits.
“(ffa) development finance activity" means to undertake an activity to promote any activity of any priority sector such as agriculture, small and medium enterprises, housing or other such sectors”
This is a blanket statement. This says SBP can’t undertake any activity to promote any activity of any priority sector. Yet this is what SBP Governor is doing most of the time. Celebrating development finance activities. The pictures are from SBP’s Twitter feed of last couple of weeks.
But this isn’t all. Construction financing is a priority sector of government and SBP has not only given a mandate on it (which would be prohibited under the new bill) but also publishes misleading statistics as covered extensively by me. See recent piece below.
SBP also can’t support Kamyab Jawan Program as per the new bill but SBP is doing that.
In addition, SBP is also acting as a REIT promotion authority
And SBP can’t promote Mera Pakistan Mera Ghar either
Bottomline
All the aforementioned activities that SBP and Reza Baqir are so keen to highlight fall into the definition of development finance activities which are explicitly prohibited by the new SBP Amendment bill.
I am just looking at a few clauses that matter to me. There may be more. These few items just go on to show:
The level of incompetence at display from SBP, IMF, MoF and federal cabinet when it comes to SBP Amendment Bill is simply breathtaking.
And here is ex-IMF professional and ex-SBP Governor raising similar questions that I have been for a long time
If you want to take one thing away from this, it should be
Don’t accept anything just because it has been reviewed by a committee. Question everything especially when it comes to economics. What worked in one developed country in 1980s won’t necessarily work in a developing country in 2020. You wouldn’t accept your doctor’s advice or prescription without googling it. Why should you accept what some economist steeped in a particular dogma is telling you?
I started this sub stack on January 4. It has almost been a year and I believe the average comes out to be one post per week. (I am on the phone so it is hard to count number of posts that I have written so far). I would like to express my gratitude to all of you who continue to read it and share it.
The SBP Amendment Bill may get passed as-is but I hope I was able to shine a light on something that might have been oblivious to you earlier.
Still some time before the new year starts where I am. I think this post is perfect post for year end. I wish you a happy and a prosperous new year. May all your dreams come true and your aspirations get realized.
Good bye from the land of icy rivers where they don’t speak English.
Enjoy