August Issue 2011

When Shahid Kardar took over as the 16th Governor of the State Bank of Pakistan (SBP) on September 9, 2010, few in the country’s financial and economic world believed that he would be able to complete his three-year term in office. Many thought that Kardar was too upright and straightforward to play ball for long with the Pakistan Peoples’ Party (PPP) government, which boasts a dismal record when it comes to the task of managing or mismanaging the country’s economy.

There were of course the sceptics who felt that the assignment was too big for Kardar given the fact that, barring a brief stint as the Punjab finance minister during the early years of former president Pervez Musharraf’s rule, he had little experience of leading a big organisation like the central bank. The chartered accountant from Lahore was better recognised for offering freelance consultancy services to multilateral and bilateral donors, including the World Bank and the Asian Development Bank, and non-governmental oganisations, rather than for working within the discipline of any institution.

These apprehensions proved right on July 18 when, after days of speculation, the government accepted Kardar’s resignation. The news did not come as a surprise either to his admirers or his critics because they had already sensed a growing estrangement between the SBP governor and the centre on key policy issues, including maintaining the independence and autonomy of the central bank.

The government’s heavy bank borrowing, its desire for a softer monetary policy stance and President Asif Ali Zardari’s insistence on making changes in the lending rules for private investors and businesspeople became those critical issues on which Kardar failed to see eye-to-eye with his political bosses.

But the spin wizards at the finance ministry have been feeding stories to the media that Kardar compromised his position by frequently visiting the finance ministry and giving concessions to the government on a number of controversial issues, including allowing Sindh Bank to open dozens of branches. “He went out of his way to appease the finance minister and even helped write his important speeches,” says a senior ministry official on condition of anonymity. “His conduct was unbecoming of a central bank governor. He was getting too close to the ministry and the finance minister — he was even writing his speeches.”

PPP insiders insist that Kardar was not cut out for the high-profile job. “He had a big attitude problem. He could never understand the vision of President Asif Ali Zardari and translate it into action,” remarks a senior PPP leader from Karachi, who is close to the presidency. She went on to say that “On a number of occasions, he disappointed the leadership. Once when the President asked him to work on the structure of the rupee swap with the Turkish currency, he brushed the idea aside… President Zardari discussed the same idea with his Turkish counterpart Abdullah Gul during a visit. Gul immediately called the Turkish central bank governor, who worked out the details within no time.”

“This was just one issue… there were a number of other such instances when Kardar failed to play a proactive role. He was more of an NGO-type and a wrong choice for this job from day one,” she concludes.

But Kardar’s inability to meet the expectations of the government, especially President Zardari’s, is seen by many as his strong point. He annoyed the President and the finance ministry on a number of occasions and openly criticised the government for its heavy borrowing from the central bank in the SBP’s quarterly reports — which has an inflationary impact — and lack of fiscal discipline.

The government’s domestic debt has jumped by 67% to 5.462 trillion rupees since the PPP government assumed power in early 2008. According to the SBP figures, the country’s total debt and liabilities now stand at a whopping 68.3% of the gross domestic product (GDP).

Kardar had also given the government a tough time on several other fronts: from the issue of allocation of funds for the Benazir Income Support Fund to his refusal to endorse the exaggerated figures of revenue collection for the fiscal year 2010-11 (July-June) at Rs 1,590 billion against the actual collection of Rs 1,540 billion. The incorrect revenue collection figures for the last fiscal year have snowballed into a big issue and have become a source of yet another embarrassment for the country as international lending agencies are now raising questions about all the data presented by the government.

Sources close to the government reveal that President Zardari personally asked Kardar to quit in a meeting following his refusal to toe the government line. One of the key points of disagreement between them was over the issue of relaxing the rules for loan disbursement, they say.

Thus, in just over a year, Kardar has become the second SBP governor to make a premature exit and the third top policymaker to leave in less than 18 months. His predecessor, Syed Salim Raza also tendered his resignation before the expiry of his term in June 2010, while the former finance minister Shaukat Tarin parted ways with the government in February 2010 on the pretext of rejoining his troubled Silkbank. But privately, Tarin, a former Citibank official, says that he anticipated the government’s unwillingness to carry out the necessary reforms that prompted him to make his exit.

The SBP governor’s resignation is seen as a bad omen for the country’s struggling economy, which remains caught in the oppressive cycle of high inflation and low growth. The investment climate is already looking bad as the net foreign investments have plunged by almost 70% in the last fiscal year compared with the fiscal year 2008, when this government assumed power.

Kardar’s departure underlines the discord between senior policymakers and professionals and their political bosses who have failed to provide an economic vision for the country or stick to the reform programme that is vital for putting the country’s ailing economy back on the track.

The SBP governor has had to perform a high-wire balancing act when trying to control inflation and achieve price stability in an environment in which the government lacks fiscal discipline and transparency, and is resorting to large-scale borrowings. Analysts say that given the lack of direction and political instability of this government, Kardar’s resignation should not come as a surprise.

The International Monetary Fund (IMF) has also criticised the government for its failure to implement the promised economic reform programme and has held back the sixth tranche of an $11 billion loan programme since August 2010. The government’s reluctance to broaden the tax net by imposing a reformed general sales tax (RGST) and taxing agricultural income remains the major bone of contention with the IMF.

Kardar had been publicly advocating the broadening of the tax base, a gradual elimination of untargeted subsidies (especially in the energy sector), reforming and privatising the loss-making public-sector enterprises and improving debt management.

His untimely departure will further erode Pakistan’s image among international donors and lending agencies and shake the confidence of both foreign and local investors.

The autonomy and independence of the central bank, one of the few respected and professionally run institutions of Pakistan, remain critical if the government wants to salvage the country’s economy. Whether the 17th central bank governor will be able to ensure autonomy or dance to the tune of his political masters, remains a moot point. Given the state of Pakistani politics and massive vested interests, the situation is not exactly promising.

This article was originally published in the August 2011 issue of Newsline under the headline “Obey or Depart.”