SBP Governor: Huge task ahead

The dust has settled. Tariq Bajwa is the SBP Governor for three years, and the currency market is back to a managed float. The question remains on the autonomy of the institution. The central bank started losing its independence the day democratic political setup was back in 2008 (Read ‘SBP Governor with a spine’, published on 9th June, 2017). The one day autonomy under Acting Governor Riaz Riazuddin was more of a drama than anything else.

There is no question the central bank should be independent and the SBP Act says so too. Its mandate is to have a macroeconomic equilibrium in order to attain maximum growth while keeping inflation in check. The interest rates and exchange rates adjustment are job of the central bank, without the influence of political motives of the ruling government, to optimize growth and inflation.

However, the fetish of sticky exchange rate is a norm in Pakistan in any high growth era. The problem is that when the economy grows over 5 percent a year, the demand driven imports heighten whilst the exporting businesses become less attractive for domestic investors. In the process, foreign exchange earnings start depleting, and the reliance on maintaining reserves growth relies on foreign investment and debt flows.

The former is a better option; and the boom of FY04-08 was supported by foreign investment in banking, telecom and energy sectors. But the sharp depreciation thereafter eluded the dollar based returns on investments. Hence, probably, in the current boom, foreign investors are shy of betting till the time currency depreciates. The most of reserves building is based on debt be it by donors, global capital debt market or CPEC.

Any Econ 101 student can tell this trend is not sustainable, and the need of the hour is to use policy tools for containing current account bleeding. Earlier, on State Bank’s warnings, Ministry of Finance came up with regulatory duty on non-essential imports, and hundred percent cash margins on imports. Government herself came up with lucrative exporters’ package, but it was mostly on paper, meanwhile the commercial banks are incentivizing remittances to route through legal channels.

All of these measures took in 3QFY17; however, the current account deficit will really shoot up in the 4QFY18. Thus, the need is to do more. The general consensus, amongst economists, and even IMF, is that currency adjustment is the key policy measure to address external imbalances. Once, the rupee finds its real value, foreign investment may start pouring in to extract juice from the rising middle class.

The question is what role a governor can play in order to undo the dominance of Ministry of Finance. It is not necessary that an ex-finance secretary would only serve the purpose of its previous boss. According to a banking historian, governors like Ghulam Ishaq Khan and VA Jaffery, who came from bureaucracy route, showed measures of autonomy even before the time the autonomy of SBP was under question.

On the contrary, in the recent past, weak governors coming from banking industry were toothless and did not have the spine to stand against Ministry of Finance’s undue interference. Yes, ideally a central banker should be either a seasoned banker or an eminent economist as is the case in many economies. Out the pool of nine emerging economies (see table), three of the central banks’ heads are economists, four are bankers, one each is politician and bureaucrat. In many economies, it is preferred that the governor of the central bank comes from within the ranks of the institution who knows the lay of the land.

Typically across the world, Head of States or Finance Ministers appoint the governor but in more developed countries (US/Japan/Sweden/Canada) by either parliamentary approval or some form of voting by a Board. Hence, there is no generic rule followed around. The need is a strong person at the helm to instill policies to avert potential balance of payment crisis. Yes, Bajwa is not from banking or economics backgrounds, but his credentials in managing public finance are commendable. He was the brain behind the differential in filers and non-filers taxation, and during his tenure at FBR the tax collection peaked in terms of GDP.

He needs similar spirit to stand for adjustments required in exchange rate and monetary policies by taking internal teams recommendations seriously. He should work on enhancing financial penetration, developing capital debt market and incentivizing banks for commercial lending. He should utilize his experience at managing public finances both at provincial and federal level to revive the dormant Monetary and Fiscal Coordination board.