The writer hosts a show on Express TV and works as a consulting editor, The Friday Times. www.razarumi.com.
There is a strong argument that elected governments have to deliver on their promises of patronage, given how the political system works. However, without generating sufficient revenues and reforming the taxation system, the expenditures emanate from reckless deficit financing, i.e., printing of notes. This is why Pakistan has witnessed some extraordinary bouts of inflation. Price levels have been rising since the present government took over and only recently they have stabilised. Whatever the finance minister may have said (e.g., hoarding causes price hikes), it is well known that fiscal improvidence and monetary expansion are contributing to inflation. One way to tackle this trend is to enhance the policy rate but this impacts the credit needs of the private sector.
Borrowing nearly Rs2 billion a day from the SBP cannot be a prudent or sustainable option. Of course, in the short term, raising revenues may not be possible but the government has to set limits. This is what the SBP has been prescribing. Pakistan’s recourse to the IMF in recent years has resulted in a situation where nearly 25 per cent of the annual budget is reserved for IMF debt repayments.
The erosion in the value of the rupee has further increased the value of foreign debt close to Rs500 billion. Each time the government intends to tighten the monetary policy, it increases its domestic debt burden as it happens to be one of the biggest borrowers from the central bank. There is no option but to pursue a tighter fiscal policy with a controlled monetary expansion. Therefore, a robust and an autonomous SBP is vital for economic management.
The departure of the SBP governor is not a good sign. There seems to be a regulatory void in the country as the key appointments in various regulatory authorities are vacant. Few are disputed in courts and the ‘loyalty’ test is being applied on potential candidates. It would be a travesty if the SBP is treated as just another government office, for it simply is not.
The SBP’s primary role is to issue notes, act as a regulator of the financial system, as the bankers’ bank and as banker to the government, as well as setting the monetary policy. It is also a key actor in managing public debt, foreign exchange and acts as policy adviser to the government on its economic relationships, especially that with international financial institutions. By no means is it a commercial bank as many — including those in the political elite — view it to be. The Musharraf government imported a good commercial banker as the finance minister. This betrays a limited understanding of the way economic policymaking works and why it is important to have professional and experienced economists who can think beyond the imperatives of balancing the books and marketing brands of their ‘success’. The Musharraf bubble burst even before it could be branded and today, many of our economic woes are directly linked to what happened during the period 1999-2007.
Dr Ishrat Husain, as a competent manager of the central bank, turned it around and its internal restructuring remains one of our recent success stories. By attracting good professionals and encouraging many to pursue higher education, the SBP has a good team available. This is why its next governor needs to be an economist, and not a financial wizard, to lead the institution and furnish pertinent advice on macroeconomic policy to the government. The SBP is not an attached wing of the finance ministry nor is it a platform to reward a loyalist. Its governor has to provide independent advice, as well as regulate the financial system’s operations. It is hoped that the government would resist the temptation to treat it as just another appointment.
Published in The Express Tribune, February 7th, 2014.
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COMMENTS (8)
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@hamza khan: Well, actually Shaukat Aziz was a private banker. You know what those are, right? While very accomplished in his role, he had no part in designing or trading actual investment instruments.
And he was an EVP at Citi when Musharraf called him. Calling him number 3 would be a stretch.
@hamza khan: Just look at the consumer credit data
@karam elahi janjua:
wheres your proof of that?
to be fair, raza, while shaukat aziz was a 'banker' he was an investment banker, not a commercial one and highly respected at that (number 3 at Citi basically). he had extensive contacts around the world that would respect him and pakistan as finance minister. the actual policy making team included economists like ishrat hussain, dr ashfaq hassan, dr salman shah and many others. shaukat aziz did not frame the economic policies. to call it a bubble is a sign of complete ignorance. what we're facing today is not because of any 'bubble' but bad financial management and complete fiscal irresponsibility shown by the PPP and now PML-N govts. the musharraf government did economic policy making the right way, factoring in all the different resources and allocating them judiciously and appropriately. the PPP and PML-N have simply tried to live another day.
Oh yea! You will bring some novice minion from an international institution. In last few decades you have brought so-called economists who were at the lowest level of an institution's hierarchy. Majority of them had only experience in least developed African economies and countries like Kenya, Uganda, Nepal, Philippines, etc. Deputy Governors of SBP have only high street banking experience. Our old fashioned governors and high street bankers don't want to adopt international standards or follow Basel regulations because we still like to live in 19th century. We don't need an economist but we need a political economist and you will rarely find a Pakistani who is political economist. Let alone noble prize, we don't have any economist who has won Smith Breeden Prize. We have the most dumb people sitting in our central bank. I know many readers will spew venom but you can't deny the truth.
The State Bank requires a governor with not only knowledge of economics but with a back bone made of stainless stell and the courage of a Spartan warrior..........will any political government be willing to appoint such a man ? Especially when it is apparent to all that political expediency takes priority over all else.