Wathra, the new Star

The Governor has one-upped the Accountant. The Accountant is the Finance Minister of the year only for South Asia; the Governor bagged the best in the world award. The Governor also has the distinction of being recognised by the mother publication of Emerging Markets that recognised the Accountant. More tellingly, SBP has not had to come out with the kind of clarification that the Ministry of Finance did about the five major state enterprises lending advertising support to Emerging Markets.
In these forlorn times, good news is an endangered species. So let's relish the moment, and thank the Accountant, the Professor, and the Governor for bringing home, in one great swoop, not one but three awards. It ought to silence the doubters and the likes of former governor Yaqoob should set aside their tomes and accept that you don't need to be a macroeconomist, or intellectually endowed, to be a great central banker. Read Wathra's interview to Euromoney.
Look at the evidence. SBP's reserves are at record high. World currencies stand battered but the Pak rupee gamely battles on. Inflation is under control and interest rates down. If that is not enough, look at the steep increase in private sector credit and loans to priority sectors like agriculture, housing and SMEs; look at financial sector's stability and banks' profitability. Finally, the devolution initiative - five critical departments of its subsidiary (BSC) transferred to Lahore.
It maybe extraordinary for the Governor of a central bank to publicly ask for another term (see Wathra interview), but with so much to show for his first three years we are all for granting him his wish.
More amazingly, SBP achieved all this without having much room for manoeuvre. We are sure when the Finance Minister visited the SBP to address its officers it was only to give them a pat on the back, not to dispel any notions of 'independence'.
To put the last nail in the coffin of the detractors, and for the benefit of his successors, Wathra should share his recipe of success; enlighten other central bankers on the instruments he used to secure what he is being applauded for: reserves build-up, stable exchange rate, much lower inflation.
To us uninitiated, reserves are built on positive trade balances, foreign investments, and inflows that are not debt creating. Remittances (now sliding) have been a boon but not enough to absorb the entire trade deficit. Now if we have a large trade deficit, virtually no FDI, and tapering grants, how do you explain the meteoric rise in reserves? Perhaps some simple arithmetic will help: over the next two years how far will SBP's current reserves of $19.5 billion take us, after adjusting for the growing trade deficit and outflows on account of foreign debt amortisation? As an aside, is the Accountant being niggardly in not acknowledging SBP's contribution to taking our reserves to such dizzying heights?
The naïve amongst us may have the audacity to question the exchange rate policy, one of SBP's primary functions. What are its determinants, and who determines it: the Board, the management, or someone else? What use does SBP make of the Real Effective Exchange Rate (REER) that its staffers so assiduously work on? What sets us apart from the other countries that have had to devalue? How does it impact competitiveness? What are the drivers -trade balance, foreign direct investment, or debt servicing costs?
We have no doubt the governor is worked hard to bring inflation down, but how? We are told central banks try to manage inflation by managing aggregate demand through various money supply interventions. What we have seen of late is a loosening of monetary policy, in response to the declining rate of inflation. Apparently, SBP's policy rate 'responds' to inflation and not the other way round. It goes up or down as inflation goes up and down, doing little to manage inflation expectations. We recognise, of course, that there is more to monetary policy than tweaking interest rates, and that is what we seek to learn - exactly what instruments were used to bring inflation down.
Incidentally, how relevant is Friedman's monetarism in countries where informal economy equals or exceeds the formal economy? How effective is monetary policy when you have virtually a single borrower - the government? And of course this heavily indebted borrower - that no one would lend to if it was not the government - has gigantic debt servicing requirements that are best met through lower interest rates. Is there a conflict of interest here? We are sure SBP has a very competent Monetary Policy Committee, with members fully conversant with money supply, transmission mechanism, and how interest rate corridor, Repos and OMOs actually pan out. But is it independent enough? Is it led by the Board representatives (appointed on provincial basis) and 'independent experts' (with little hands on experience of 'credit view'), or SBP management?
We have no doubt with so much under the Wathra belt, growth and investments and jobs will follow and the unkind world will soon allow our exports to match at least those of Bangladesh. Meanwhile, the financial system is working well and if there is another KASB lurking in the bush it will be handled with the same alacrity and transparency. Let's not worry about the footnotes - the auditors who kept certifying KASB to be a 'going concern', and whose valuation was at such huge variance with the special auditors appointed by the SBP; or if equal opportunity was provided to all the banks to take over KASB.
Success breeds many fathers. Wathra has been properly magnanimous in sharing his glory, not just with the SBP team but also Islamabad. After all, we are all playing for the same country club!
There is another reason to rejoice. Wathra set the record straight by telling Euromoney that he owes his position to no patron; that he was selected as Deputy Governor purely on merit, without even applying for the job - the then Governor sent for him and recommended him after a three-hour 'grilling'. We must acknowledge the then Governor's sharp acumen for spotting hidden talent from amongst scores of commercial bankers. With the death of nepotism and the birth of a new star our financial galaxy stands reconfigured. Here is to Wathra, the new star.
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