Never before in the history of Pakistan have financial circles in particular, and the public in general, shown so much interest in the appointment of the next head of the country's Central Bank.
For the last six months, speculation in the media is a reflection of this concern. Visibly, there is now a deeper realisation that, in an open economy, inflation rate as well as stability of exchange rate are very important, as the two have a direct bearing on the health of the economy and the family budget.
The credit for imparting awareness effectively to the citizens and managing media perceptions about various economic linkages of the policies that the Central Bank adopted, goes entirely to the retiring Governor of the State Bank of Pakistan, Dr Ishrat Husain.
In the last six years he brought the SBP into the public eye by making himself accessible at various platforms and holding frequent discussions, in all major cities and towns, with the stakeholders in the financial sector, trade and industry.
In the process, he may have also made life difficult for his successor who would be expected to maintain the high profile at the breathtaking pace of Dr Husain. A writer and a versatile speaker, Dr Husain produced about a dozen monographs; has been regularly contributing articles to journals and newspapers; and so has been a much sought after speaker at seminars and conferences at home and abroad.
Dr Ishrat Husain retires on 1st December 2005 after two terms of three years each as SBP Governor, under the patronage of President General Pervez Musharraf who, by an amendment in the State Bank of Pakistan Act on November 04, 2002, also became the ex-officio appointing authority of the Governor of the country's Central Bank. The amendment was made exactly a week before the approval of Ishrat Husain's second term.
Dr Husain, still on roll as a bureaucrat, joined the State Bank as its 13th Governor on December 02, 1999. Dr Husain, who happens to be a graduate of the Executive Development Programme, sponsored by such institutions of repute as Harvard, Stanford and INSEAD, majored in Development Economics from Williams College (1972) and later earned a Ph.D in Economics from Boston University.
Thus, Dr Husain brought with him to the State Bank, the experience of a career civil servant and a seasoned World Bank economist, who had held numerous prestigious positions ranging from diplomacy oriented Resident Rep to as high a managerial position as Chairperson of the World Bank Public Sector Governance Group.
Ever since the assumption of office of Governor, Dr Husain devoted himself to implementing a major restructuring programme of the State Bank and took immediate measures to push ahead the remaining task of reforms of the banking sector. Dr Husain has unequivocally acknowledged that these reforms would not have been possible without the leadership, active support and guidance of President Musharraf. Finance Minister (now Prime Minister) Shaukat Aziz was indeed a big help.
Being a banker of international repute, he understood the importance of a strong and viable banking sector for the economy. That he won their support in enforcing reforms was enough proof of his persuasive powers. He did a job worth recognition and it was exactly in recognition of his efforts for reforming and restructuring of Pakistan's financial sector that The Banker magazine, a subsidiary of the Financial Times, awarded him the prestigious Central Bank Governor of the Year Award 2005 in Asia. This was a singular honour for a State Bank Governor in the history of the country.
It is owed to his re-enforced efforts at reforms and restructuring, initiated since the late 1980s, that the State Bank today finds itself far better equipped to manage itself progressively. Its regulatory and supervisory skills have improved to the extent that in terms of expertise the State Bank has already overtaken the private sector banks.
Analysts would not hesitate conceding that Dr Husain not only has been able to initiate reforms afresh and see them through in the financial sector, he has also changed the way the apex bank - the State Bank of Pakistan - itself worked.
It is particularly satisfying to note that Dr Husain opted to govern the State Bank through an elaborate consultative process comprised at the top of the Corporate Management Team (CMT) headed by the Governor himself, assisted by two other sister teams, namely, the Group Management Team and the Departmental Management Team. The democratisation of the decision making process within the Bank was thus a hallmark of Dr Husain's way of governance.
He adopted the same approach while discussing things with the fraternity from scheduled banks and other financial institutions. He was a patient listener all along. In the process, he not only made easy the task of central bankers but also especially, the lives of commercial bankers through his drive to clean up the financial sector.
He was a pro-active policy formulator who disdained re-active approach. He maintained this posture of management time and again during his tenure, no matter if the issues pertained to his own house or to those whose regulation was his statutory responsibility. This is the trait of a humane, benign manager which he always was.
To better appreciate the era of Governor Husain on the policy front, one has to go back to the economic scene of 1999. After our nuclear explosions, the country was passing through the pangs and pains of the worst economic sanctions of its history.
External sector had weakened to the extent that on May 28, 1998, the day the Chaghai mountains went roaring with our nuclear explosions, we were left with only $1 billion of reserves, forcing us to suspend withdrawals in foreign currency from our foreign currency accounts. Before Dr Husain took over, these had gone down around half a billion dollars after reaching $2.3 billion at the end of June 1999.
The brief revival was the handiwork of his predecessor who resorted to purchase from the kerb market on the ground that these dollars were actually the part of the expatriate remittances which had gone astray because of the operation hundi and hawala practices.
In the meanwhile, he also conveyed to the donor club countries implying that if they did not reschedule payments on our past loans, we could well nigh go defaulting. The donors yielded to the request for rescheduling the loans appreciating our difficulties as also the need to better protect their own interests.
Although by continuing the same informal ways Dr Husain succeeded in raising the reserves again to $1.9 billion by end of June 2000, but he instantly realised the urgent need to bolster the country's external reserves so that, at least henceforth, Pakistan was able to meet its exchange obligations especially the onus of payments when they fell due after the expiry of the relief granted by the donors.
We also need to keep in view that during the era of his immediate predecessor at the State Bank, under the watchful eye of the International Monetary Fund, a very strict demand management programme was in place. Interest rates were raised on the demand of Fund with restrictions on government borrowing to the parameters agreed in the programme. We were required to preserve a minimum floor for foreign assets or in common language foreign reserves and were also under obligation to keep government spending to a level that results into a reasonably low deficit to GDP ratio.
So there were effective brakes on monetary expansion to the extent of credit utilisation by private sector and to the extent of NDA agreed with the IMF. The only door open for monetary expansion to take place was NFA or the floor imposed on net foreign assets and the IMF had left it open doubly sure that inflows would hardly find a way to this route.
Since political governments hardly lived within means both NDA and NFA targets appeared very difficult achieve. Gimmicks were played to satisfy IMF by foul-playing with accounts of the banking systems, particularly in the case of government borrowing, and by corollary, the NDA, to hide the actual behaviour of aggregates being monitored by the IMF.
After the military assumed power in Islamabad, it was thought prudent to admit foul-play by putting the blame on the politicians and restart with a clean slate. The IMF appreciated the admission of the foul play allowing us to rectify the accounts to their true position here and there and then come up with new deals with the IMF.
The IMF became ever more demanding, front-loading the aid programmes with the most unpalatable of conditions. Surveillance and monitoring of accounts by the international body also became stricter. IMF indicated that they would only accept central bank verified data to forestall any fresh fudging of accounts.
Evidently, Dr Husain had to execute his responsibilities in a very tight situation at least with one benefit that under the aforementioned IMF programmes, the freedom to operate independently in the monetary area was limited.
You could not exceed limits put on credit expansion in private and government sectors otherwise you risked violation of the conditionality and face the consequences. The foreign sector was allowed freedom to operate in the sense that it was always desirable from IMF point of view that we end up preserving reserves or improving them a bit mainly because here the IMF prescribed a floor rather than a ceiling.
Dr Husain very ably and shrewdly used this freedom in devising ways and means to improve reserves of the country and preserving the Rupee-Dollar parity in a way that allowed the rupee to gain strength even if slowly and gradually.
It would be evident from the foregoing that as a first option Dr Husain used his skills and ability in the foreign sector.
His efforts not only bore fruit but also emerged as the strongest point of his tenure, which received additional bolstering by the 9/11 incident along with the windfall gains that followed. Expatriates' remittances found their way to the banking channel. Capital accumulated abroad over the years also found its way back to home and was for a time used as a substitute to bank borrowing. And there came dollars from the western world to compensate us for our co-operation in the war on terror.
The Rupee-Dollar parity which in the kerb market surged to Rs 64.25 in September 1999 improved in the following months and remained in the range of Rs 53.70 to Rs 55.15 to the end of FY2000. During FY01 and FY02 the rupee had spells of appreciation at least in the first halves and the ascent had to be moderated by necessary policy measures as was necessary to minimise the depreciation which set in during the 2nd halves.
The tendency in the exchange rate to depreciate during FY05 and the on-going FY06 has since been effectively checked by shifting the burden of financing in the case of petroleum imports from the interbank market to the State Bank. On November 12, 2005, the parity improved to Rs 59.77 in the interbank market and to Rs 59.85 in the open market for selling compared with Rs 59.75 in the interbank market and Rs 60.48 in the respective markets on 25th June, 2005, thus effectively reducing the open market premium to just a few paisa.
Liquid foreign exchange reserves which had improved to $3.2 billion by June 2001 improved significantly thereafter and rose to $6.4 billion by June 2002 though it was more because of 9/11 developments leading to global attacks on hundi transfers and reverse capital flight forced by unfolding events. Yes, the course adopted in 1999-2000 and 2000-01 had already stabilised the country's forex position.
By a prudent policy stance, Dr Hussain succeeded in accumulating reserves year in and year out to reach the historic $13 billion mark in April 2005. He effectively resisted all demands to squander the reserves for the common welfare as critics continued asking what was the fun of accumulating reserves if these could not be used to improve the lot of the poor.
Dr Hussain took great pains explaining to the people at large and his critics as to why it was necessary to preserve them - the reason being the desire to maintain a rupee-dollar parity which inhibited imported inflation and at the same time helped the export sector. Such a stance, according to him, better promoted the good of the country and of the common man.
No one can claim to be perfect. There had been weaknesses especially in the monetary management area.
The editorials of Business Recorder would bear this out. In the last few years, the country has been awash with cash principally because of record breaking remittances by expatriates and aid receipts from the West to reward Pakistan for its co-operation in the war on terror.
Instead of controlling the liquidity to the desired levels, a policy to kick-start the economy was adopted by the State Bank probably in collusion with the government. Concurrently, a policy of sterilisation was followed by unloading the NDA of the SBP but it was not enough to contain inflationary impulses in the economy.
With liquidity left largely unmanaged, interests rates on bank loans came tumbling down to the detriment of the depositors. To keep bank deposits captive in commercial banks, returns on non-bank saving schemes were cut drastically. Alternatives were to be found to accommodate excess liquidity profitably.
Leasing for the purchase of cars, air conditioners and other consumer durables became lucrative businesses overnight as these were the main alternatives found. In fact the banks were over-aggressive in their loaning operations so much so that they would not hesitate calling people and inquiring if they desired to avail of loans for purchase of a house or a car or just to obtain a credit card, to facilitate their shopping through borrowed money. People appeared to have responded with matching hunger.
Those who had one car bought a second car, may be one - the latest model - for the kids' mama who previously did not have even a two years' old. At the same time, a lucrative avenue was provided to people with tax evaded money to book dozens of cars and earn a quick buck from premiums (on-money) from genuine or non-genuine buyers. Yes, second-hands disposed of by the rich became available for the middle class.
The production of consumer items went sky-rocketing which certainly activated the economy but the cost was enormous. Food supply shortages were first blamed for rise in inflation, and later, POL products. Domestic consumer prices during FY05 doubled to 9.3 percent from 4.6 percent in the preceding year.
In July-September 05, the rate was still as high as 8.7 percent. Our eastern neighbour also faced larger than ever POL bill but has kept inflation in check. They did not pursue a policy of negative interest rate and create an asset bubble in the economy.
Inflation manifests itself not only in domestic prices, but also has a serious impact on the balance of payments position, particularly the trade balance. A cursory look at the balance of payments for the last few years would be quite revealing. The trade deficit reached to a record high $4.5 billion in FY05 compared with just $1.3 billion in the preceding year.
It is surprising how a central bank, which won autonomy only recently, forgot that maintaining price stability was its primary responsibility as of all central banks around the world - a function that Dr Husain highlighted himself in the foreword to the Inflation Monitor- a new publication introduced by the SBP in September 2005.
Even here, the main purpose was stated to be the education of the people at large about various aspects of the phenomenon so that the affected are able to develop an understanding of the inevitability of the emerging price situation. The need perhaps was not to educate the folks about the phenomenon but to actually put in place measures to reduce the pinch which man in the street felt so badly in the last year or so.
Why not bring out a publication like 'The State Bank- The People's Friend' and then go listing the measures it is taking to alleviate the sufferings of the common man through its monetary management. The common man elsewhere has already learnt that the greatest suffering of the modern age is unbridled inflation. That was Dr Husain's greatest failure when it came to real test, as the monetary policy was more or less guided by the IMF people for the earlier years of his tenure.
Thanks also to facilitation of car leasing- an important element of consumer financing, today we find the worst traffic mess on our roads, especially in big cities, where half of the roadsides are occupied by car show rooms at every busy road, adding only to the commuters' stress driving to office in tension or returning home in tension- finding no way out from jammed roads.
The consumerism, let loose in the economy, has already turned even an otherwise spendthrift and status hungry nation into miserable borrowers and shoppers? But there is an institutional risk also.
The defaults, which are surely likely to occur at a much greater speed than in the case of production loans to which the economy was geared prior to the advent of consumerism, would pose a serious threat to the health of banks sooner than later leading to grave economic consequences.
Why did Dr Husain fail to manage this aforementioned unusual flow of liquidity in the economy and why did he not channel it to other productive avenues instead of to consumerism and speculative business in shares and real estate? These are questions which Dr Husain should be explaining to his critics.
Even when expansion due to foreign assets slowed down to account for 11.2 percent of the total increase in money supply in FY05, the share of domestic credit shot up to 88.8 percent - private credit alone accounting 96 percent of it aided by consumer loans, which rose by 206 percent in FY05.
The State Bank failed to enforce effective demand management because doses of increase in benchmark interest rate, which it did effect at intervals as the main tool of demand management, were so small that these worked more like an appetizer rather than a check.
The excess liquidity could have been easily managed if the State Bank possessed its own paper. Here the question is why the Government did not approve the SBP's request to issue it when it was badly required. Only the Prime Minister, who earlier was the Finance Minister, can perhaps answer. Any way, in case the SBP failed to get its own paper approved by the government, it also could have raised cash reserve requirement if it was convinced of the need of drawing more liquidity from the system.
Dr Husain would also be remembered for his educative role. At forum after forum, he had spoken tirelessly explaining intricacies of economic policy to every shade of people within and abroad.
Our gut feeling tells us that the government, or the finance people, to put the things in true perspective, did not approve of the idea of floating central bank security (bond) because they feared loss of revenue.
How come, the educator failed to convince his colleagues in Finance in the matter? It was a matter of national interest and not of some revenue loss here and there. One may recall what happened to the interest rate structure. Its tumbling down, below the inflation rate, was a real shock!
The weighted average rate of return on advances plummeted to an average of 13.61 percent as of end of June in FY01, 13.19 percent in FY02 to 9.40 as of end June FY03 and further to 7.28 percent by end June FY04, only to stand at marginally higher at 8.81 percent at end June FY05. The entire onus of the tumble-down was transferred to depositors.
The weighted average rate of return on their deposits dipped to 5.27 percent as of end FY01 and further to 3.61 as of end FY02 despite the fact that weighted average rate of return on advances remained almost unchanged at the FY01 level or well above 13 percent.
Thereafter the rates nose dived to reach 0.95 percent as of end FY04 and stood at 1.37 percent by the close of last fiscal year. The spread between the two rates stuck around 8 percent or higher during the period except at the close of FY04 when it worked out to 6.33. With the spread refusing to decline and inflation rising, the plight of depositors was no better than that of the captive audience left at the mercy of a bore speaker.
Clearly, State Bank's only pursuit should have been stability of domestic currency within and outside through prudent management of liquidity. It appears we were not prepared to face the situation as was the case with October 8 earthquake. What we pursued was rightly termed by an analyst as 'Monetary policy working at cross purposes'.
The State Bank officially talked about an inflation target but in practice pursued an accommodative monetary policy to support a high growth rate which we did achieve. The cost was monstrous - reappearance of inflation.
This analyst was of the view that whatever the declared policy of the State Bank to curb inflation now, 'given the time lag between monetary expansion and its ultimate impact on the economy of at least one year, as indicated by the State Bank, inflation during FY05, to the extent it could be attributed to monetary factors, reflected the excessive monetary expansion earlier and not just due to supply side factors. The impact of record rate of monetary expansion during FY04-05 is yet to appear.'
Dr Husain's predecessor, Dr Yaqub was seen battling, at least publicly with government's endeavour to use the banking system to kick-start the economy. The public display of anger of the then Prime Minister, Nawaz Sharif Governor Yaqub was seen live on television.
Therefore, ...Dr Husain's successor as Governor should not only be sufficiently equipped with knowledge of macro-economic issues, money matters and international economics but also should be one who would not allow any political elements of whatever hue or colour to use the system in contravention of the existing laws. Apparently, for about last ten months or so, Dr Husain had also become more assertive and less accommodative.
During his stay at the World Bank, he authored 'Pakistan: The Economy of an Elitist State' understanding fully well the dynamics of the elitist model of growth within which the whole politico-economic processes unfolded in his country and what could possibly be done to loosen the grip of the elite and improve the lot of the less-favoured by enforcing appropriate changes here and there.
As Governor of the country's Central Bank, he indeed enjoyed a whole range of powers to engage in a Jehad against the elite composed of 'rent seeking class' at least in his own sphere - the banking system - where, as Governor of the Central Bank, he held sway on monetary policy and thus determined the cost and availability of liquidity - the all important ingredient of a modern monetized economy, and as regulator of banks enjoyed exclusive authority to mould the rules in favour of the poor.
The issue at heart was thus how to facilitate poor man's access to bank credit - both in terms of cost and quantum - even while championing the cause of market mechanism.
The World Bank is the greatest champion of financial sector reforms, yet it provides the cheapest credit to the world's poorest nations. So there was a case for such an approach to ameliorate the lot of the have-nots in Pakistan. The overall chunk of credit available to this segment of society had been awfully small even during the last six years.
Business Recorder joins President Musharraf, who on the occasion of conferring upon Dr Ishrat Husain the Hilal-i-Imtiaz, as also the Prime Minister Shaukat Aziz, who, during the Governor's farewell call, recognised that during his tenure at the State Bank of Pakistan, he played a key role, as a member of the economic management team of the Government.
Business Recorder also joins Stephen Timewell, Editor-in-Chief of The Banker, in saying that reforms and restructuring of Pakistan's financial sector undertaken by Dr Husain have definitely resulted in a more resilient and efficient financial system. Well done, Dr Ishrat Husain! It would be worth recalling an economist's assessment of the 'Greenspan legacy' some time back.
HE CONCLUDED HIS ASSESSMENT STATING: 'If a future conference looks back at the Greenspan era, its conclusions will be less flattering, if house prices have fallen, dragging the economy down with them.' This was said about the person who 'ran the Fed as well, as it could be run'. When a future conference looks back at Dr Husain's era, also nicknamed the 'Greenspan of Pakistan' by some, its findings could be more flattering saying if house prices sky-rocketed then what, the economy at least was kick-started.
The notable Governors of SBP, except for one, are remembered by the countrymen for their services not as the Central Bank heads but for what they did outside the SBP. The first Governor of SBP, Zahid Hussain is remembered for the first five year plan; Governor Ghulam Ishaq Khan (later President of the country) for dismissing elected governments; Governor A.G.N Kazi for implementing the nationalisation policy under Z.A. Bhutto and later on devising ways to dismantle it under General Zia-ul-Haq; Governor Jaffery for his failure as Advisor to Benazir to protect the misuse of the banking system and Dr Mohammad Yaqub for freezing private foreign exchange deposits in banks on whatever pretext.
TO CONCLUDE: Dr Ishrat Husain, who is still an invaluable 'resource', must be put to good use. Only time will tell whether his legacy at the SBP will be more precisably definable and fully visible in all aspects by what he does next.
Comments
Comments are closed.