The International Monetary Fund (IMF) has once again pressed the government of Pakistan to strengthen the independence of the State Bank of Pakistan (SBP), this time by urging the removal of the Finance Secretary from the SBP’s board of directors. The proposal, revealed in the IMF’s latest Governance and Corruption Diagnosis Mission report, also includes amendments to the Banking Companies Ordinance 1962, which would restrict the federal government’s powers over commercial banks.
These demands are part of a larger reform agenda that aims to ensure good governance, financial transparency, and accountability in Pakistan’s banking and monetary policy framework. However, the recommendations have sparked debate in Islamabad, raising questions about sovereignty, institutional balance, and the extent of IMF’s influence over Pakistan’s economic decision-making.
Background: IMF and Pakistan’s Economic Reforms
Pakistan has been a frequent borrower from the IMF, relying on bailout packages during periods of economic distress. In exchange for financial assistance, the IMF often imposes structural reform conditions, including measures to reduce fiscal deficits, increase revenue collection, and enhance transparency in governance.
The State Bank of Pakistan has been at the center of these reforms. In 2022, under IMF pressure, Pakistan passed the SBP Amendment Act, which granted unprecedented autonomy to the central bank. The law ensured that the SBP could set monetary policy independently, free from direct government interference.
As part of these reforms, the Finance Secretary was stripped of voting rights on the SBP board, although he continued to serve as a member. Now, the IMF is demanding his complete removal from the board to further minimize government influence.
IMF’s Latest Recommendations: Key Highlights
According to sources familiar with the matter, the IMF’s latest set of recommendations includes:
- Removal of Finance Secretary from SBP Board
- Although the Finance Secretary no longer has voting rights, the IMF insists that his presence on the board creates a channel for indirect government influence.
- Amendment to Banking Companies Ordinance 1962
- Currently, Section 40 of the Ordinance allows the federal government to instruct the SBP to inspect any commercial bank.
- The IMF wants this power removed, arguing that it undermines central bank independence.
- Filling of Deputy Governor Vacancies
- At present, only one permanent deputy governor, Salimullah, is in office.
- Critical departments, including monetary policy, banking supervision, and foreign exchange, lack permanent leadership.
- The IMF wants these vacancies filled urgently.
- Transparency in Appointment and Removal of Officials
- The IMF has demanded that the reasons for the removal of the Governor, Deputy Governors, non-executive directors, and members of the Monetary Policy Committee (MPC) be made public to avoid political manipulation.
- Reform of Appointment Process
- While the government has shortlisted Nadeem Lodhi as deputy governor, cabinet approval is still pending.
- Another candidate, former deputy governor Dr. Inayat Hussain, remains under consideration, but his dual citizenship has become a stumbling block.
Why the IMF Wants Finance Secretary Out of SBP Board
The IMF’s insistence on removing the Finance Secretary reflects a broader principle: the central bank must operate free of political interference.
- The Finance Secretary, as a senior government official, represents the fiscal arm of the government. His continued presence on the board, even without voting rights, is seen as a conflict of interest.
- Central bank boards worldwide typically consist of independent economists, financial experts, and technocrats, not serving government officials.
- By removing the Finance Secretary, the IMF aims to create a clear separation between monetary policy (handled by SBP) and fiscal policy (handled by the Finance Ministry).
This separation, the IMF argues, is crucial for controlling inflation, ensuring currency stability, and maintaining investor confidence.
Autonomy vs. Accountability: The Debate in Pakistan
The IMF’s proposals have not been received without criticism. Within Pakistan, policymakers, economists, and parliamentarians are divided on whether giving absolute independence to the SBP is in the country’s best interest.
Arguments in Favor of Autonomy
- Control of Inflation: Independent central banks are better able to manage inflation without political pressure to artificially lower interest rates.
- International Credibility: Autonomy strengthens investor confidence and signals to lenders that monetary policy decisions are made on merit.
- Reduced Political Interference: Prevents short-term populist measures that could destabilize the economy.
Arguments Against Autonomy
- Loss of Sovereignty: Critics argue that removing the Finance Secretary and curtailing government oversight could weaken Pakistan’s sovereignty in financial matters.
- Accountability Concerns: An overly independent SBP might not be adequately accountable to parliament or the people.
- Policy Coordination: Some economists warn that disconnecting fiscal and monetary policy could lead to conflicting economic strategies.
The Importance of Filling Deputy Governor Posts
Another urgent IMF concern is the absence of permanent leadership at the SBP. At present:
- Salimullah is the only permanent deputy governor.
- Former deputy governor Dr. Inayat Hussain is serving in an interim capacity but faces disqualification due to dual nationality concerns.
- The government has considered appointing Nadeem Lodhi, a seasoned banker, but cabinet approval is still pending.
This leadership vacuum poses a risk to key policy areas, including exchange rate management, banking supervision, and monetary policy formulation. For the IMF, filling these posts is not just a technical requirement—it is essential to restore confidence in Pakistan’s financial governance.
IMF’s Governance and Corruption Diagnosis Mission
The recommendations stem from the IMF’s Governance and Corruption Diagnosis Mission, a framework designed to assess countries’ financial and institutional systems.
- The mission focuses on identifying vulnerabilities that allow political interference, corruption, or inefficiency in economic institutions.
- For Pakistan, the SBP has been flagged as an institution requiring stronger safeguards against government influence.
- These reforms align with the IMF’s broader strategy of ensuring that its financial assistance is not misused through politically motivated economic decisions.
Government’s Position: Still Under Consideration
As of now, the government of Pakistan has not formally accepted the IMF’s proposals. Officials have indicated that the matter is still under review.
There is hesitation within Islamabad due to:
- Political sensitivities of appearing to surrender too much control to the IMF.
- Potential backlash from opposition parties, which may accuse the government of undermining sovereignty.
- Concerns that full acceptance of IMF demands could complicate coordination between fiscal and monetary authorities.
Potential Implications of Implementing IMF Recommendations
If Pakistan agrees to the IMF’s proposals, several outcomes could follow:
- Positive Impacts
- Enhanced credibility of the SBP in the eyes of international investors and credit rating agencies.
- Strengthened monetary policy independence, leading to better inflation control.
- Improved chances of securing further IMF tranches and international financial support.
- Negative Impacts
- Reduced influence of elected representatives over central bank decisions.
- Potential friction between the Ministry of Finance and the SBP.
- Political backlash domestically, with critics accusing the government of “outsourcing” economic policymaking to external forces.
Conclusion: A Test of Balance Between Autonomy and Sovereignty
The IMF’s demand to remove the Finance Secretary from the State Bank of Pakistan’s board is not just a technical adjustment—it is a test of how far Pakistan is willing to go in granting independence to its central bank.
While greater autonomy could improve economic management and enhance investor confidence, it also raises questions about sovereignty and accountability. For now, the government remains cautious, weighing the benefits of IMF compliance against the political costs of appearing to relinquish control.
In the coming months, as Pakistan negotiates with the IMF for further financial support, the fate of the SBP’s governance structure may become a decisive factor—not just for the success of the IMF program, but for the broader direction of Pakistan’s economic future.
