I told you the job is tough
July 18, 2011
In an article carried by Business Recorder on Sept 14, 2010, I mustered courage to come up with a note of caution for Shahid H. Kardar, making it clear to him that this is not a TV talk where he can provide objective analyses to viewers on issues ranging from central bank's monetary policies to National Finance Commission Award with relish.While welcoming him to the real world of real economy, real finance and real GDP, I also sought to caution him that from now onwards he would be required to inform the government in particular about the power of economic tools that he had spent past several decades learning. Reports suggest that he resigned due to his differences on opinions on a variety of issues that mainly pertained to fiscal and monetary matters. Disputes between central bank and Ministry of Finance (MoF) take place all over the world, although globally, there is no such firm practice or law for Central Bank autonomy.
Price stability is the primary objective of a central bank. Central banks and ministries of finance are supposed to co-ordinate, exchange information and prepare joint strategies for the government. Creation of money and managing exchange rate should be insulated against political interference and Government Treasury.
A central bank is granted autonomy with a view to ensuring that there is no political interference. There are many examples of differences between central banks and ministries of finance. For example, in India RBI commonly faces the music. US Federal Reserve during Paul Volker (1979-87). Tussle between BOJ and MoF is a common occurrence.
Honestly speaking no SBP Governor was ever able to address the real issues. Inflation remains very high and is unlikely to reduce to a single digit in the next couple of years due to central bank's willingness to accept incremental government securities auction target averaging at 12 percent to make quarterly T-bills and Pakistan Investment Bonds (PIBs) auction successful to help in reducing government's fiscal deficit target instead of focusing on growth to create jobs. Hence, growth prospects continue to remain bleak in the absence of any money flow to private sector.
A lack of initiatives in relation to unchanged monetary policy stance has not produced the desired results in pulling down the inflation numbers that continue to remain a worrisome factor. Extended periods of sharp hike would have slowed down inflation and by now SBP would have been in a better position to reduce discount rate that could have given boost to the ailing business community. Monetary policy did not contribute to the jump in export earnings, which has witnessed a slump, however modest, in size. The surge in export earnings is in fact due to rise in commodity prices in the international market.
Higher discount rate is fast becoming a pain in neck, as the rise in debt is at a very alarming pace. Funding of domestic debt at an average of over 12 percent for the next three years means that another Rs 2.2 trillion to be added to the debt stock. External debt financing will resume in last quarter of 2012, so what is the strategy.
Another dangerous development is the accrual deposit growth in the banking industry at roughly 8 percent per annum, which means a fall in discount rate by 3 percent could see a collapse of many banks unless floor of 5 percent is removed.
Despite Discount rate of 14 percent, the SBP failed to come up with a policy to force banks to offer depositors better return as the banking spread remains above 7.5 percent. Another such area is central bank's failure to arrest the rise in currency in circulation, which is comfortably hovering over Rs 1.5 trillion. Circular debt remains an unresolved big mystery. It is also worth mentioning that the efforts of the then Governor SBP, Salim Raza's, to develop debt market received a setback as Kardar decided to close down the department.
Kardar's sudden departure, fifteen days ahead of issuance of monetary policy statement, takes away the flexibility available to the Monetary Policy Committee of SBP. If the SBP policy rate is cut steeply, the market will see it as a quid pro quo for appointment of the new governor and a dent on the autonomy of SBP. As a consequence, MPC's hands in a way are now tied. It will now be up to the Central Board of Directors of SBP to do what is right. Show spine by acting as independent directors and not as governmental appointees.
