According to the 2006 Oxford Analytica report on Monetary Transparency for Pakistan, the country has "Enacted" overall transparency standards consistent with the requirements established by the International Monetary Fund's (IMF) Code of Good Practices. The 2007 IMF Article IV Consultations report, notes that Pakistan's monetary statistics are consistent with the requirements of monitoring, but could stand improvement in order to be more suitable for use in analysis and policymaking. One significant deficiency identified by the IMF, in its 2004 Financial System Stability Assessment, was Pakistan's failure to issue advance release calendars for data dissemination and to provide advance notice of monetary policy meetings by the Central Board of the State Bank of Pakistan (SBP). The IMF's 2007 Report on the Observance of Standards and Codes, as well as the OA report, praised Pakistan for progress made in recent years regarding monetary policy transparency. OA, in particular, noted that the SBP's new Governor introduced structural changes that have helped to improve the central bank's functionality and, therefore, transparency. Pakistan is not yet a subscriber to the IMF's Special Data Dissemination Standard but participates in the less rigorous General Data Dissemination System.

General Overview

Oxford Analytica's (OA) 2006 Monetary Transparency report accorded Pakistan an overall rating of "Enacted" (p. 258), which is the same as its rating for 2005. According to the report, 2006 began with the first female governor assuming the helm of the State Bank of Pakistan (SBP), Dr. Shamshad Akhtar. The new governor's expertise derives from her prior experience with the Asian Development Bank and the World Bank. OA reports that Dr. Akhtar has "undertaken an ambitious restructuring" of the SBP, in which a separate Monetary Policy section or cluster has been established (along with Banking, Research, and Financial Markets and Reserve Management clusters). OA does suggest that SBP capacity building may be required to accommodate this restructuring, however. Also in 2006 the Monetary and Exchange Rate Policy Committee was transformed into the Monetary Policy Committee (MPC), headed by Dr. Akhtar and charged with setting interest rates. OA notes that the MPC does not release its minutes or a meeting summary to the public. OA also cautions that although full autonomy was conveyed to the central bank in 1994, legal clauses allowing the federal government to supersede the central bank and delegate its authority to another agency if it determines that the SBP has failed to carry out its legal responsibilities, is problematic. Even though the government must report to parliament as soon as possible with a detailed statement of the grounds for such an action, OA notes that while this right is embodied in the SBP Act, there is no specification within the Act of legitimate grounds for such an action, nor is there guidance as to which agency should assume the SBP's authority. OA notes that "this is a significant obstacle to the transparency of the monetary policy process and a potential threat to the operational autonomy of the central bank" (p. 260).

Pakistan does not yet subscribe to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS), participating instead in the less rigorous General Data Dissemination System (GDDS). According to OA, the SBP has achieved improvements in its data that have enabled the central bank to acquire weekly, monthly, and quarterly financial accounts and other bank data. Inadequate computerization in some banks has, however, resulted in inconsistent data quality across the reporting banks.

According to the 2004 International Monetary Fund Financial System Stability Assessment (FSSA) covering monetary policy, the SBP observes good transparency practices, for the most part. In 2007 the IMF issued a new ROSC that dealt with Pakistan's monetary statistics, noting that the Pakistani monetary authorities had improved the statistical frameworks and procedures used in compiling and disseminating monetary statistics. Nonetheless, the IMF found areas where improvements could yet be made. The IMF recommended that the SBP website provide the public with advance notification of major methodological changes, and that the same notice be provided in its monthly Statistical Bulletin. The methodological soundness of the SBP survey could be improved with regard to elements of exchange rate and gold price data. Accuracy and reliability could be improved by preparing monetary data revision studies, once the SBP finalizes its official revision policy. Data serviceability could be improved by "improv[ing] the consistency of data on position between the SBP and scheduled banks" (p. 9).

The IMF's 2007 Article IV Consultation, published in 2008, notes that monetary growth in Pakistan increased in 2006/07, but importantly central bank's net lending to the government had ceased. The report asserts that Pakistan's de facto exchange system has remained a conventional peg, which led IMF staff to encourage Pakistani authorities to aim for greater exchange rate flexibility to enhance the effectiveness of monetary policy and facilitate the policy response in case of shocks, while the authorities argued that exchange rate stability was critical to promote confidence and encourage capital inflows. In the statistical appendix (Appendix III) to the Consultation report, a discussion of monetary data is included. It notes that "data are broadly adequate for effective surveillance, but further improvements in the availability and timeliness of key economic statistics would help policy analysis and formulation" (p.7). The report describes monetary statistical product in Pakistan to be comprehensive in scope and, in accordance with OA findings cited elsewhere, states that the monetary survey's classification system is "broadly in line with the Monetary and Financial Statistics Manual (MFSM)" (p. 8). The SBP indicated to the IMF staff that it ultimately intended to adopt the MFSM, acknowledging that to do so would improve its monetary statistical product. In addition, the 2007 Consultations disclosed that the banking sector's reporting framework has been improved, but noted that discrepancies on interbank position data reported by the SBP and scheduled banks still need to be resolved. A standardized report form would help here but it has not been implemented. The Balance of Payments Manual, fifth edition (BPM5) has been used to prepare balance of payments statements since the 3d quarter of 2003, with some exceptions. The 2007 Consultations report notes that Pakistan needs to improve both coverage and timeliness in its data dissemination for employment/unemployment, central government operations, national accounts, wage/earnings, and external debt data in order to qualify for SDDS subscription. Also, Pakistan must provide greater detail in the breakdown of both central government and external debt, and must "update and expand the metadata on compilation and dissemination practices" (p. 9).

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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The 2006 OA report awards Pakistan a rating of "Enacted" (p. 259) and notes that the State Bank of Pakistan Act (SBP Act) of 1956 (plus amendments) lays out the country's institutional framework for monetary policy. The Act sets a twofold role for the SBP: securing monetary stability and ensuring the soundness of the financial system, but OA finds that "monetary stability" is imprecisely defined. OA further notes that SBP must pursue two objectives simultaneously: price stability and growth. Because of this ambiguity, the government has been free to switch from one policy framework to another, compromising transparency. An amendment to the SBP Act that tightened definitions and prioritized objectives would enhance transparency. OA reports that the SBP is currently drafting such an amendment.

The current SBP Governor is Dr. Shamshad Akhtar, who took office in January of 2006 to serve a three-year term. Her background includes working at the World Bank and Asian Development Bank. Since taking office she has begun what OA calls "an ambitious restructuring within the bank" (p. 259) aimed at improving SBP coordination. Her newly created Monetary Policy Cluster is charged with setting monetary policy and conducting economic research and analysis. It is also the SBP's statistical department. Within the SBP, there is a separate Islamic banking sector to handle increased demand for sharia banking. Training was sought from Malaysia. Islamic banking activities are reported in the SBP's Financial Sector Assessment and the Banking System Review, both of which can be found on the SBP website.

In 1994 full autonomy was conveyed to the central bank, and amendments to the SBP Act passed in 1997 extended SBP authority to banking sector regulation, further strengthened its monetary policy independence, and limited the government's right to borrow from the central bank. While two other entities - the Monetary and Fiscal Policies Coordination Board (MFPCB) and the National Credit Consultative Council (NCCC) - are involved to some degree with monetary policy issues, OA notes that neither can take actions that impinge on the SBP's monetary authority. OA states that "the government does not interfere with the workings of the [SBP]" (p. 260). However, if the federal government determines that the SBP has failed to carry out its legal responsibilities, it has the legal authority to supersede the central bank and delegate its authority to another agency. If it does so, it must report to parliament as soon as possible with a detailed statement of the grounds for such an action. OA notes that while this right is embodied in the SBP Act, there is no specification within the Act of legitimate grounds for such an action, nor is there guidance as to which agency should assume the SBP's authority. OA notes that "this is a significant obstacle to the transparency of the monetary policy process and a potential threat to the operational autonomy of the central bank" (p. 260).

The SBP Act authorizes the central bank to make loans or issue securities to all levels of the government and stipulates the terms by which this may be done. Information on such advances is disclosed on the SBP website and in other publications. However, OA reports that the SBP Act specifically prohibits the central bank "from participation in trade or commercial activities" (p. 261) and from owning property. It cannot issue unsecured loans. The SBP does not print currency but rather delegates that task to a subsidiary, SBP Services, which handles a number of other support tasks as well. The SBP Act also addressed the central bank's role in allocating profits. The Act creates a number of credit funds which "are financed in part by a share of the SBP's operating profits" (p. 261). In addition, the federal government has the right to decree the allocation of some SBP profits to a Reserve Fund. Such allocations are detailed in the SBP Annual Report. The SBP also plays several agency roles on the government's behalf. These are agency roles are specified in legislation.

Open process for formulating and reporting monetary policy decisions.

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In its 2006 Monetary Policy report, OA rated Pakistan's performance on this principle as "Enacted" (p. 262). According to the SBP Law, the central bank must pursue two monetary policy objectives: price stability and economic growth. The ultimate policy target is inflation. The SBP Central Board sets monetary targets consistent with the year's National Credit Plan (dealing with the credit requirements of the private sector) after drawing upon inputs from the NCCC and the MFPCB. In addition, the SBP must maintain the national currency's external value. The means to achieve this objective are detailed in the Foreign Exchange Act of 1947. The SBP's monetary operations are published in SBP Circulars which are available to the public.

OA goes on to state that "the primary governing body of the SBP is the Central Board of Directors" (p. 262). The terms and conditions by which members are chosen and the terms of office they may serve is set forth in law. The board is comprised of the SBP Governor, MoF representatives, and representatives of each of the provinces. The government nominates board members. The MPC, MFPCB, and NCCC are called upon to serve in a consultative capacity. The MPC is headed by the SBP Governor. It has expressed the intent to meet every six weeks at a minimum. Meeting minutes are available to Central Board members but not to the public. Instead, the MPC issues a press release following each meeting. OA describes the function of the MFPCB as harmonizing monetary and exchange rate policy in order to "ensure consistency among macroeconomic targets of growth, inflation and fiscal, monetary, and external accounts" (p. 263). Its members are the Governor of the SBP as well as representatives from the MoF, the Ministry of Commerce, and the Planning Commission, as stipulated by law. The law also sets out the MFPCB's responsibilities. It does not make policy. It does not make public much detail about its operations. Efforts to improve MFPCB transparency are under way. The NCCC was created in 1972 and comprises the Governor of the SBP and representatives drawn from several ministries, as well as from the provincial governments. It also includes representatives from the private sector. It usually meets in July and January of each year but its schedule is not announced in advance. If a meeting results in major decision making, a press release is issued.

OA's report notes that the SBP has a comprehensive and timely publication program, including its Annual Report, Quarterly Reports, and the Monetary Policy Statement (published twice yearly), all of which are accessible on the SBP website. The Monetary Policy Statement provides a review of the country's economic outlook and sets forth the central bank's policy stance. Since 2006 it has become increasingly detailed, discussing the trends and policies of the prior year and offering information that looks forward into the coming fiscal year. The SBP's Quarterly Reports must be submitted to parliament and must include a statement of performance along with the monetary data and economic analyses relevant to monetary policy and other SBP responsibilities. The SBP website also provides access to the monthly Statistical Bulletin, the weekly Statement of Affairs, the Monthly Export Receipts, the bimonthly Pakistan Balance of Payments, the annual Banking Statistics of Pakistan, the Inflation Monitor, the annual Pakistan Financial Sector Assessment, the Quarterly Performance Review of the Banking System, and the annual Banking System Review. The SBP also publishes material dealing with Islamic banking online. In recent years the SBP has increased its outreach to the private sector for inputs regarding monetary policy and proposed prudential regulations changes. The schedule for such meetings is not publicly available, however, and no minutes are published. The SBP meets quarterly with representatives of the Pakistan Bankers' Association as well for consultative purposes. OA reports that "the SBP places all draft prudential regulations/guidelines and other policy documents on its website for comments and suggestions from the stakeholders before final issuance" (p. 264).

According to OA, reporting regulations required of Pakistan's financial institutions are stipulated in the Banking Companies Ordinance of 1962 "which gives the central bank full authority to supervise and regulate banks and financial institutions" (p. 264). A new Banking Act is currently being drafted to replace the 1962 Ordinance. The SBP participates in the drafting of prudential regulations affecting the banking and financial sector. Supervision of the financial sector falls to the SBP, and is handled by two different departments. One is the Off-Site Supervision and Enforcement Department, the other is the Banking Inspection Department. OA notes that SBP inspectors are considered to be both professional and well-qualified for their tasks. Baking supervision, however, is still thought to need substantial improvement. In particular, OA reports that the regulatory framework for nonbank financial institutions needs strengthening. OA states that "in January 2004, the central bank adopted a risk-based system of monitoring, surveillance, and supervision of banks and development finance institutions" (264), resulting in improved surveillance and regulation overall. However, OA does caution that regulator independence still needs work, among other weaknesses in the supervisory system.

Public availability of information on monetary policy.

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According to OA's 2006 report, the SBP produces a great many publications relating to the subject of monetary policy. These publications are in addition to the central bank's Quarterly and Annual Reports. In addition, the SBP posts data to the IMF's GDDS bulletin board. It does not yet subscribe to the more rigorous SDDS, but once it has improved its quarterly GDP data and redresses a few other issues it should qualify for SDDS subscription in the near future. The SBP website provides public access to its monthly monetary survey and daily data on interest rates, including the government's short-term and long-term security rates are also published. The SBP publishes a Monetary Survey that follows the IMF's MFSM in terms of analytical framework. The IMF's BPM5 informs the categorization used to compile elements of Pakistan's balance of payments data.

OA reports that public access to the SBP balance sheet is enabled through the inclusion of that data in the SBP Annual Report and is prepared in accordance with International Accounting Standards. Other data, such as market transaction data, is provided in SBP publications and in newspapers. A weekly summary balance sheet is also published. The SBP also publishes a weekly Statement of Affairs, available on its website. There is same-day online reporting of monetary operations and aggregate monetary operations data is included in the Annual Report. Foreign exchange data is available on the SBP website. OA notes that "both the External Relations Department and the Publications Department handle all requests for information from both the press and the general public" (p. 266). All data published on the SBP website is available in English, and Urdu text is increasingly available. The SBP also publishes online a range of press releases. User assistance is available from both the Banking Policy and Exchange Policy Departments, and the External Relations Department has created the position of Chief Spokesman.

The IMF's SDDS and GDDS websites disclose that Pakistan does not yet subscribe to the SDDS but participates in the less rigorous GDDS. The 2007 IMF Article IV Consultations report notes in Appendix III that SDDS eligibility can be achieved once Pakistan makes certain improvements in its data reporting regime, including the coverage and timeliness of its national accounts and balance of payments data.

Accountability and assurances of integrity by the central bank.

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The 2006 OA report rated Pakistan's performance on this principle as "Enacted" (p. 267). The SBP Governor and officers testify before the Economic Coordination Committee of the Cabinet and the parliament as a whole. This is not required by law, however. On the other hand, the SBP is required to respond to questions raised by parliamentary committees and representatives, and it is bank policy to provide a written response to the general public's enquiries as well. The Senate and National Assembly Banking Committees are entitled to review the SBP. Provisions of the SBP Act call for the submission of a Quarterly Report to parliament by the SBP's central board of directors. The report must include a statement of current economic conditions along with a discussion of prospects for growth, the money supply, the balance of payments, developments in prices, and the credit situation. Citing a 2004 IMF report, OA noted that "the SBP follows all good practices on accountability and assurances of integrity of its staff" (p. 267).

The SBP Act requires the central bank to publicly disclose its audited financial statement, which includes its balance sheet and its profit and loss account. This information is published in the SBP's annual report. The financial statement is subject by law to external audit, which is done by two independent auditing firms drawn from the private sector. In addition to the two external audits, the bank has an Internal Audit and Compliance Department that is also legally mandated to review the compliance of the SBP's departments and branch offices. The SBP Annual Report also includes the Report of the Auditors, which OA says is done according to International Auditing Standards, as well as all of the SBP's operating expenses and revenues. Another provision of the SBP Act requires the central bank to hold an annual shareholders' meeting in which the bank's annual accounts and its work during the previous may be discussed. Also subject to shareholder discussion is the annual balance sheet and accounts report filed by the auditors. OA notes that one problem with the external audit process is that the board selects the auditing firms, and these may include shareholders to the bank. The internal audit department reports directly to the SBP governor. The department is also responsible for proposing solutions to regulatory problems and investigating financial mismanagement. OA notes that "the department can assign compliance responsibilities to directors of the departments concerned, chief managers of offices, and the governor (p. 268). The government may elect to appoint auditors of its choice to examine the SBP's accounts. By law the SBP must disclose provide full access to its books and documents to such an auditor, who then files a report to either the government or the SBP shareholders, as the situation requires.

The SBP Act stipulated the rules governing the appointment of SBP's board, their terms of office, and the criteria by which they may be removed from office. OA notes that "the SBP has a formal code of conduct for employees, which is available on its website" (p. 268). The code of conduct was set in place in 2001 and details the rules governing staff recruitment and promotion, discipline, the appeals process, and policies regarding loans to staff, as well as rules regarding confidentiality. The Banking Companies Ordinance of 1962 sets out legal protections for SBP staff for their official actions. An amendment to the SBP's Staff Regulations has broadened staff legal protections to require that defense costs for actions arising from their official duties be covered by the SBP itself.