ISLAMABAD: The resignation of Pakistan central bank governor Shahid Kardar last week reflects badly on the government's management of the economy, a senior vice president at Moody's Investor Service said on Monday.
"Whether or not Mr Kardar's resignation is accepted, the affair underscores the discord and lack of continuity that afflicts senior policy leadership, and ultimately casts a harsh light on the government's management of the economy," Tom Byrne, senior vice president at Moody's, wrote in a note released on Monday.
Byrne did not say whether Kardar's resignation, which has yet to be accepted by the government, would have an impact on Moody's B3 credit rating for Pakistan. Kardar has yet to explain why he resigned.
Kardar was the second central bank governor to leave in just over a year and the third senior policymaker to quit in Pakistan in less than 18 months, following the previous central bank governor Salim Raza's resignation in June 2010 and former finance minister Shaukat Tarin's resignation in February last year. Ratings agency Standard & Poor's said the resignations of the central bank chiefs send out a negative signal but were not surprising.
"It reflects the difficulties of the central bank governor to do his job: to maintain price stability in the backdrop of the dominance of the fiscal side in the form of large borrowings," said Agost Benard, S&P credit analyst. "Given Pakistan's unstable domestic political situation, the resignation does not come as a surprise." S&P rates Pakistan B-, just one notch above a CCC rating that would imply an impending default, but Benard said the B-rating reflected a lack of stability of key institutions. It is unclear exactly why Kardar resigned but there have been media reports about policy differences.
The State Bank of Pakistan has openly criticised the government about borrowing from the central bank, which has an inflationary impact. It has also noted a lack of fiscal discipline which has seen the government's domestic debt double since June 2007 to 31.8 percent of gross domestic product.
PATCHY FISCAL REFORM "When external borrowings are included in government debt, the percentage rises above 60 percent of GDP, a dangerous level for an economy with a very weak tax base and increasingly limited financing means," Byrne said in the note.
The International Monetary Fund (IMF) has also criticised the government for its patchy implementation of fiscal reforms and has held back the sixth tranche of an $11 billion loan programme since August last year.
IMF and Pakistan officials are due to meet this month though no official date has been announced. The federal government has been reluctant to implement fiscal reforms such as the imposition of a reformed general sales tax demanded by the IMF and supported by the central bank.
State Bank of Pakistan, this month, suggested broadening the tax base, gradually eliminating untargeted subsidies and improving debt management. Last week, the US confirmed it would hold back $800 million to Pakistan, or nearly a third of its total security aid, in part because Pakistan had expelled American military trainers and imposed other limits on visas for US personnel.
But Pakistan's external accounts give the country some sense of financial security. For the 2010/11 fiscal year the government posted a provisional current account surplus of $542 million, the first full-year surplus after seven years of deficits, according to Topline Securities.
The country's foreign exchange reserves stood at $18.11 billion in the week ending July 10, close to a record high $18.25 billion reported in the previous week. "That level of reserves provides a substantial cushion to near-term financial shocks, but it may be leading the government into a state of short-sighted complacency about its conduct of policy and creating a blind spot about underlying risks to macroeconomic stability and long-term economic health," said Byrne.
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