Financial Credibility
The enactment of the State Bank of Pakistan (SBP) Ordinance of October 5, 1993 by the Moeen Qureshi Administration giving the SBP considerable powers of autonomy with respect to monetary policy and the subsequent repeal by the present Ms Benazir regime as well as a fresh Ordinance replacing it thereof on Jan 1, 1994 has aroused quite a level of intellectual discourse within the economically knowledgeable both within and outside the country. The question of the impact on economic management has become of topical content and needless to say, well-wishers are looking forward to some kind of equitable working arrangement separating fiscal policy from monetary policy which would be in the best interest of the country’s economy.
The principal question to answer is what should be the level of autonomy of a Central Bank in a country like Pakistan? It is commonly believed that in developing countries Central Banks are (and must be) universally subordinated to the Government in the overall economic interest. The factual relationship could be the other way around, mainly that Third World countries have remained backward because among other things they have not allowed the development of various institutions vitally necessary for the emancipation of the economy. This is not much unlike the process of democracy building its roots in a country, dependant mostly on strong policies rather than the frequent holding of elections or number of political parties, etc. It is extremely important that developing countries promote institutions like the Central Bank, the various planning agencies and related financial institutions so that they can graduate into financial maturity. It is a tragedy that in Pakistan there is no tradition of commercial banks or other financial institutions having full-fledged Policy and Research Departments. Therefore, our Economic Analysis is generally very poor and usually not backed up by the information data that is the prime pre-requisite of carrying out such evaluation e.g. credit rating and project appraisal agencies in the private sector, it being understood that public institutions will always be under pressure to produce favourable data for the government in power. The aforementioned must constitute the backbone of correct decision-making for resource allocation by the government.
It has been established that high inflation rates and relatively weak Central Banks go together as do financial stability and strong Central Banks. About the quantum of autonomy it has been stated by a well-known economist that Central Bank enjoy as much autonomy as they can take. Monetary policy, enunciated by the SBP, must be an integral part of the government’s economic initiatives. While there may be differences at the policy formulation stage, at the actual point of implementation monetary policy must fit into the general framework of government policy. The fact that monetary policy may be more flexible than the fiscal policy or trade policy shows the strength and importance of this policy instrument. Once the micro-economic objectives are mutually agreed, there should not be unnecessary interference in the working of the Central Bank. Any differences between the government and the Central Bank can certainly be overcome by frequent meetings and dialogues.
Because of the environment created by the October 5, 1993 Moeen Qureshi Ordinance and because of the bad track record of earlier democratic governments on this subject, both the PPP and the forerunners of PML (N), the present government has to be extra careful in addressing the question of SBP autonomy. Earlier governments have gone to the extent of removing SBP governors, suppressing the publication of the adverse Annual SBP Reports and even when it was printed, excising certain portions which were unfavourable to the government in power. It is indeed amazing that the PM’s Advisor on Finance, Mr. V.A. Jafarey, a man of great integrity who as Governor SBP was on the receiving end of government pressure, could now countenance such negative policy features.
There are elements who insist that even today the SBP enjoys much more autonomy than any Central Bank in South Asia, however it is also a fact that no less than four Governors of SBP have not completed their term of office, a surefire indicator that Government felt compelled to drastic action when faced with advice contrary to its political compulsions. On the other hand, the SBP cannot become a State within a State which seemed to be the interpretation of the Moeen Qureshi SBP Ordinance. SBP autonomy in motivated hands could be fatal for any elected government. Even in a developed country with mature institutions, the Central Bank should not be so independent so to be accountable to Parliament only. On the other hand it is also not advisable to put qualitative limits on government borrowing from the Central Bank with the proviso that government can go beyond the limits through permission of Parliament. However, once government has agreed to the micro-economic objectives then the SBP should have the discretion to change the monetary policy to achieve those objectives. Just because monetary policy is relatively easy to use an instrument of cheap resource, it should not be made to carry the burden of fiscal policy. Such matters as the Governor SBP being given more than one term should be carefully handled. A Governor SBP once appointed should be allowed to complete that term so as to not give the impression that he could be changed at will if he gives advice contrary to what the Government wants to hear.
The pre-requisite for an autonomous State Bank of Pakistan (SBP) must be the selection procedure laid down for personnel of consequence to safeguard the credibility of the system. We must also give an in-built security to those appointed. The Moeen Qureshi Administration’s decision on SBP autonomy was a model for World Bank influenced decisions and policies thereof. Essentially this followed the futuristic model of developed countries with mature institutions, both factors very much missing in Pakistan. It depended very much on the choice of individuals who would run the SBP but no procedure for selecting such powerful financial Czars was defined. In essence the Government of the day could theoretically appoint the biggest scoundrel and we could do nothing about it for the period of his term or at least till he had irretrievably damaged the economy or caused such havoc as to invite universal reaction to his continued incumbency. In the US of A the President nominates the Chairman and members of the Board of Governors of the Federal Reserve for a fixed tenure but the appointees have to subsequently undergo strict scrutiny by US Congress before their appointments are confirmed similar to the procedure adopted in other major non-elected appointments to public office. This is meant to ensure that the US President cannot use his discretionary powers without fear of censure, he has to subject the potential appointees to the process of public accountability. Many appointees fail to pass the test, some even refuse to subject themselves to such scrutiny, e.g. recently Adm Bobby Inman, President Clinton’s recent appointee as Secretary Defence withdrew his name from the process. As an individual Dr. Yaqoob merited appointment many times over, however, Parliament should have had the opportunity to verify his antecedents and question his views so as to give legality to this powerful appointment. It is fair bet that some of the Directors would not have survived public scrutiny. A computer matching of the Directors’ names with the list of people paying taxes (and the quantum thereof) as well as the loan defaulters list can still be extremely embarrassing. As such, while opting for a superior dealing plane in the governance of the economy, the Moeen Qureshi Administration fell back to typical Third World methods of nepotism and favouritism in appointing the rest of the SBP team. They thus themselves undercut the whole basis of the new system, a mechanism that is heavily dependent upon the credibility of the individuals in its hierarchy.
Imposed on the incoming Administration only a day or so before they took power which was also unfair, the new SBP team seemed to resort to over-governance of the financial institutions. Having seemingly shed itself of its fetters from the government, the SBP proceeded to chain its own subject financial institutions. While there was certainly grave laxity in most of the procedures laid down and there was nothing wrong in the enforcing of strict implementation of Prudential Regulations, it should have been gradually done. Indeed one of the first draft circulars even laid down that the promotions and transfers of senior executives could not be made without approval of the SBP. Wise counsel prevailed and this was never implemented in the actual notification. However, it showed up the SBP in a bad light and undercut the importance of their sustained monitoring role, particularly with respect to credit and advances. The PPP Government was certainly justified in registering its alarm with respect to this Catch-22 status, in the bargain it over-reacted by repealing the Oct 15, 1993 Ordinance on January 1, 1994 rather than let it constitutionally lapse on February 4, 1994.
Today we are poised on the verge of historical crossroads with respect to the viability of our financial institutions. The selection of each and every individual to high financial office by the present government will be the subject of close public cynosure, within and outside the country. The removal of Zaki, an apolitical financial technocrat of known integrity and his replacement as Chairman PBC by Mohammad Ahsan, considerably less qualified in commercial banking, was a bad move. We have an extremely bad track record as respects the nationalized commercial banks, some of their executives have been responsible for gross default, particularly in enriching themselves. Permission to open private banks was given to certain extremely unsavoury individuals who blindly and openly stole public money. To the credit of SBP, they never cleared such individuals as Chief Executive or Chief Operating Officers. One cannot single out the PPP for misdemeanour as nepotism and corruption was alive and well during the IJI regime also. It was the previous Government that permitted some absolute scoundrels to commit highway robbery in the name of banking. These unscrupulous rascals are now using the public money they stole to keep the law from bringing them to book. By strengthening rather than weakening the SBP the Ms Benazir Government will avoid recurrence of financial scams by these white collar criminals. While engaged in uncovering officially sponsored crimes of earlier days, the PPP regime should adopt a bi-partisan approach. Whatever be the pressure, if the public perception is that Ms Bhutto seems to condone malfeasance or sponsor/tolerate those who have perpetuated financial skull duggery in the past, then we are heading pell mell into problems of the magnitude that this country has never seen.
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