By Dr. Kamal Monnoo
Alan Greenspan (Former Chairman of USA’s Federal Reserve) once remarked that, “Heading the Fed requires much more than mere competence and understanding. It requires a nose, intuition, vision and a belief in monetary management to keep the economy in the right direction.” He obviously was not talking about central bank governors in Pakistan. Over here our governors of the State Bank of Pakistan (SBP) are typically subservient to the Finance Minister or the government of the day, displaying little independence or assertiveness to guard the autonomy of the institution they represent. Ironically, in this regard, the presumably democratic tenures – especially that of PML-N – have been the worst. Independence and autonomy of the central bank have been made mockery of by deliberately picking minnows as governors or acting governors who like ‘good boys’ await the finance minister’s nod before taking even the slightest of decisions. It is in this context that one saw Mr Dar’s press conference, post Wednesday July 5’s Pak Rupee debacle, as humour in poor taste where he tried to pin the blame of rupee’s un-checked slide on the acting governor of the state bank and announced that an enquiry in the matter will follow. Whom was he trying to fool? No marks for guessing that the real aim was to demonstrate his government’s power on the financial markets (including that on the stock exchange), to create a hype and to give a message that any attempt to remove PML-N from power will throw the Pak economy into a spin.
A central bank’s autonomy in any country’s economic governance is of paramount importance as it plays a pivotal role in safeguarding national currency, taming inflation and keeping sanity in allocation of national financial resources; often proving to be the bulwark preventing the government turning into a predator on to its own people. Compromise this role and you see: A government encroaching on private sector’s domain; capital moving from efficient entrepreneurial private sector hands to the often in-efficient cum non-transparent hands of the public sector managers; and most dangerously, accumulation of unsustainable or unserviceable debt by the government. A cursory look at the malaise afflicting today’s Pak economy and we see a heavy presence of all these three elements. And the culprit: Putting the wrong man at perhaps the most important financial sector job in the economy.
On what kind of difference can a good central bank governor bring about, one just has to glance across the border in India. While we have been selecting crony bank managers and bureaucrats with no real global exposure nor vision, India’s recent selections to the post of governor of the Reserve bank of India (RBI – Central bank) have been stellar. Raghuram Rajan, a world-renowned economist (ex-chief economist of the IMF) with global authority through lectures (in leading institutions like Chicago’s Booth School, Princeton, etc.) and numerous prestigious publications on capital and monetary management, entrepreneurial innovation and on the role of a responsible government, was selected 4 years back. True to his promise, he delivered by bringing long-overdue reforms within and without the Indian central bank. During his tenure he literally earned rock star status as under him, India’s fiscal deficit was reduced from as high as about 8% to 3.50%, toxic cleaning took place after a gap of more than 3 decades, stabilised the Indian currency at a level and India’s market-credit outlay in a manner that shored up competitiveness of the Indian industry; built up India’s largest ever foreign exchange reserves; jealously guarded the independence of the RBI by constituting a six-member monetary policy committee to permanently ward-off political pressure or any likelihood of meddling in the central bank’s affairs; and through transparent policies returning a new confidence to both domestic and international markets, in-turn paving way for unprecedented investment levels in the history of India. Despite heavy opposition from many political circles, the Indians ensured that their central bank remains in good hands, so when Mr Rajan stepped down an equally apt person was selected. His successor, Urjit Patel, a deputy governor under him and himself a global financial celebrity, is a doctorate from the famous Yale University, and was well placed to take over as some of the most critical changes that took place under Mr Raghuram Rajan were in fact introduced by Mr Patel. Back home, the comparative credentials of our choices of governors and acting governors come across as being pathetic – chequered track records, narrow civil service backgrounds, zero economic vision, little related experience, and no real global authority nor standing.
The trouble is that these shenanigans on part of the government, like the one we saw on July 5, can prove to be costly. SBP’s own earlier report on the pressure on Pak Rupee and how it is being artificially held at its current parity notwithstanding – the report was later amended allegedly on the behest of the finance minister – the fear is that once the applecart of an unrealistic value grounded on such a delicate base is disturbed it becomes very difficult to control. Not even Mr Dar’s strict directions to the contrary to the commercial banks can help much! A currency slide once in effect finds its own market equilibrium.
Sadly, in all these political games it is Pakistan and its people who are coming out as losers. If the Rupee loses its value, for every 1% devaluation, the stock of national debt (local and foreign) goes up by approximately Rs310 billion. This in turn damages other macro-economic indicators, negatively affecting financial management of the government. Secondly, during the last 4 years, the Ministry of Finance in an effort to support the Rupee, has asked government and semi government entities to take dollar loans to pay off their imports (Foreign Exchange import loans, rather than buy dollars from the interbank market). The inventory of current such foreign exchange loans is estimated to be around US$1.8billion. Any devaluation of the Rupee means a direct and proportionate hit on the P&L of those entities, which can cause a material hit on profits. Lastly, most of our imports are inelastic and any devaluation of the Rupee will cause the economy to import inflation, which in turn will increase reported inflation numbers. To counter this, the economic managers will have to increase interest rates. And since the Government of Pakistan is the largest borrower, any increase in interest rates will have a huge impact on fiscal deficit and Government’s ability to manage its finances going forward.