April issue 2015

By | Economy | Business | Published 3 years ago

Successive governments in Pakistan have often been accused of using the central bank to serve their own vested interests in acquiring uninterrupted funds rather than ensuring the much needed operational autonomy of the institution. In the past, there are rare instances where the governor of the State Bank of Pakistan (SBP) had failed the ministry of finance.

For decades, there has been a debate in Pakistan about extending full operational autonomy to the central bank, and analysts have argued that the rising debt cannot be contained nor commercial banks effectively regulated in the absence of such measures. How best governments in Pakistan can ensure an improved fiscal deficit along with low inflation, are questions that need to be addressed.

It is no secret that government after government has simultaneously  borrowed from both the SBP and commercial banks to meet their pressing funding requirements, which has eventually resulted in the accumulation of Pakistan’s total public debt to over Rs 16 trillion.

However, it seems that the situation is improving, because on one hand the massive build-up of local and foreign debt is getting unmanageable and on the other the IMF, which has offered a conditional three-year Extended Fund Facility (EFF) amounting to US$ 6.67 billion, this time around, seems unprepared to accept the present status of the SBP. Officials of the Fund are urging the government to amend the 1954 SBP Act to further extend its autonomy. Unfortunately, the move is being delayed as the Standing Committee on Finance has yet to vet and recommend the proposal to the National Assembly for final approval.

Critics of the government maintain that as long as the central bank continues to operate like the monetary wing of the finance ministry, nothing can be achieved in terms of ensuring operational autonomy. They also term the IMF a ‘partner in crime’ for issuing waivers, every now and then, to bail out the PML-N government. Officials of the Washington-based multilateral agency are accused of following the dictates of the US State and Treasury Department rather than deciding issues on merit. The three-year EFF is often termed a ‘political programme’ rather than an economic programme by many senior economists.

State Bank Governor Ashraf Mahmood Wathra does not, however, believe the picture is totally bleak and asserts that things are improving to ensure maximum autonomy and effective regulation of fiscal matters. In an interview with Newsline, Mr Wathra responds to various concerns.

There is a lot of discussion about the autonomy of the SBP. What is your take on the issue?

After taking over as governor, I have concentrated on my job,  maintaining cordial relations with the ministry of finance in order to deliver effectively. I am not one to unnecessarily antagonise the federal government, but that does not mean I do not say what I have to on various issues. On the issue of autonomy, everybody knows that the government has decided to amend the 1954 Act of the SBP to offer more operational independence to the central bank. I am sure the standing committee of the National Assembly will soon finalise the issue and send it to the National Assembly for approval. For us, the most important issue is to make the bank’s Monetary Policy Committee (MPC) more effective, in terms of taking independent decisions. I can tell you that a draft has been prepared, for submission to Parliament, to make the MPC very effective.

Right now, all issues go to the SBP’s Board of Directors for approval, but after the legislation, the MPC alone will decide important issues. Now, will this not be gauged as being amply independent? I am very optimistic that the central bank will soon have the required operational autonomy, surely with the blessings of the federal government and its finance minister.

Unfortunately, there is a perception that the finance ministry dictates to the central bank whose officials cannot refuse anything coming from the centre. All the central banks around the world do at times oblige their respective governments and there is no harm in doing so, as long as somebody does not ask you to take illegal decisions.

What are the other challenges that need to be taken seriously?

The foremost challenge right now is to substantially enhance exports, for which the central bank is extending all possible facilities and concessions to exporters. In fact, falling exports had been the weakest link in the economy, which is now getting the attention of both the government and the central bank. Emerging market trends show that the current year is the fourth consecutive year witnessing stagnating exports. Despite a reduction in the re-financing rate to largely facilitate exporters, things did not improve.

What are the factors contributing to low exports and why have imports doubled for the first time in the country’s history?

We do not need rocket science to understand the issue. Power outage is the number one problem and in this regard, the Small and Medium Enterprises (SMEs) are suffering the most, particularly in the Punjab. The situation in Sindh is comparatively better, as it is getting adequate electricity and gas supplies. However, the good thing is that the federal government is making an all-out effort to remove power and gas shortages, to benefit industry. Besides, I honestly believe that we need to diversify our exports with more value addition to capture new export markets.

It is said that exports cannot be increased in the presence of an over valued Pak rupee and that the government needs to revalue its monetary unit.

I don’t agree with this view, because many a times in the past, the value of the Pak rupee was decreased but exports still did not increase. The more important thing to understand is that the government and central bank have left it to the market forces to determine the worth of the Pak rupee. Why should we intervene? The need of the hour is to create an export surplus. This export surplus will only happen when we overcome the energy shortage, one of the major worries of the government.

The latest monetary policy statement is being termed as over optimistic by critics, who do not agree with the central bank that the economy is moving in a favourable direction.

I do not know why some people always have a pessimistic view about the economy. Is it not true that inflation is at a historic low, and our other economic indicators have started performing better than before? Similarly, a further reduction of 50 basis points to 8 per cent interest rates is also good and should encourage the private sector to borrow more for the setting up of new businesses across Pakistan.

How would you comment on  the IMF’s relations with Pakistan and its economy?

You can judge this by the combined release of US$ 1.1 billion to the central bank recently. It was because of the successful combined fifth and sixth review in which the government did not seek any waiver. The Fund officials were largely satisfied with the pace of economic reforms in the country and this will shortly lead to the disbursement of the next tranche. These reforms are in the areas of revenue, energy and the central bank sectors. One should not forget that the government has undertaken a structural reforms process, without which the Pakistani economy could not be turbo-charged.

Can we say that the government no longer faces serious economic challenges?

No, I wouldn’t say that, as there are challenges which are being tackled head-on. We may have to work harder, even though a lot has been achieved in terms of improving major economic indicators. The international financial institutions and international rating agencies are reposing confidence in the economy, which is good for everybody.

This interview was originally published in Newsline’s April  2015 issue.