Change of guard at State Bank

Finally, the President of Pakistan, Asif Ali Zardari, decided to change the Governor at State Bank of Pakistan through powers that he enjoys under the 17th Amendment to the Constitution. Although Dr Shamshad Akhtar was entitled to be considered for another three-year term, she earned the Presidential ire for not clearly explaining to the nation that the newly elected government or the government that came as a result of February 18 elections had not much to do with the unprecedented governmental borrowings from SBP, in the last financial year.
And, her exit also seems to be a direct consequence of her failure to adjust the petroleum product refund prices when the international oil prices shot to some unprecedented levels. Ever since autonomy was granted to the central bank through a legislative act, SBP has had three governors.
Dr Muhammad Yaqub, who was the first, was never on cordial terms with the government of the day. It is an open secret that his relationship with the then Advisor to the PM on finance, Vasim A Jafferey, was not good. It came to a point where the Governor SBP had to announce a mini-budget to bring back Pakistan into an IMF programme.
Yaqub will be credited for improving the quality of research at the SBP. But the Pakistanis in general remember him as the Governor who presided over the seizure of their foreign currency deposits in the aftermath of the nuclear test by Pakistan in May 1998. Dr Ishrat Husain was inducted by the military government of Pervez Musharraf.
He worked with the system to successfully bring about capacity enhancement at SBP. He was indeed lucky to leave the bank only after completing two full terms - permissible in law - when the country's economy was still in a boom phase. As such, he is widely respected in both business and official circles. He might not have been considered for this job because of a variety of reasons, including his past association with Musharraf government in capacity of SBP governor.
Like Ishrat, Dr Akhtar was also a Musharraf appointee. The appointment of first woman as governor of the central bank arguably contributed to Musharraf's 'enlightened moderation' doctrine. She apparently had no problems working with Prime Minister Shaukat Aziz but did not see his Advisor on Finance Dr Salman Shah eye-to-eye.
Once the economic slide set in with rising inflation; differences sharpened between SBP and this government on its causes. While Dr Shah felt that it was due to exogenous factors (rising oil and food prices in international market) - the governor felt it was necessary to tackle the 'second round effect' of inflation by tightening the monetary policy. Dr Akhtar battled both the government as well as trade and industry.
Though hers was arguably a right approach, she could not stop the government from pursuing a very lax fiscal policy. All the macroeconomic targets were missed and Pakistan once again was at the brink of bankruptcy ie not having enough forex reserves to pay for the liabilities and imports. Akhtar took pains to explain why she was raising interest rates when rest of the world was slashing them.
The trade and industry which is said to be paying high financial cost will never forgive her on this count. However it goes to her credit that the level of economic analysis at SBP has improved considerably and SBP reports are regarded as more authentic and informative than the data emanating from various government sources.
SBP now has had economists from the International Monetary Fund (Yaqub), the World Bank (Ishrat); and the Asian Development Bank (Shamshad). It will now have a second commercial banker (first being Kassim Parekh for a few months) at the helm. Saleem Raza, the new Governor, has spent years abroad but has been suitably acclimatised during the last two years at the Pakistan Business Council with country's economics and finance.
His intensive and productive interaction, at the last budget with this government's functionaries must have provided him with a golden opportunity to become more perceptive about the political and bureaucratic challenges he would be ultimately facing. President Zardari has already chosen Advisor Tarin as his economic czar. Tarin and Raza being ex-Citi Group - know each other very well.
They also know the reasons behind the failure of Shaukat Aziz, also from Citi who, after a successful stint as Finance Minister, could not meet success in the capacity of Prime Minister. If technocrats could limit their focus only on their professional task and expend all their energies on ensuring that the right economic decisions taken by them do not fall prey to political squabbles, bickering and expediency, Pakistan could be among the middle income countries.