It is profoundly regrettable that the State Bank has lost three Governors in three years despite the fact that the Governor is appointed for a specified period and can only be removed under extraordinary circumstances. Although, her entitlement allowed her to complete second three-year term Dr Shamshad Akhtar was first to go on grounds of not being a team player.
She was followed by Salim Raza, who remained Governor from January to June last year. He claimed to have quit for "personal reasons". He was brought in by the then Finance Minister, Shaukat Tarin. He left once the captain of the team himself quit. Shahid H. Kardar joined the central bank in September, 2010 and the expectation was that he would successfully complete his tenure. Although, he enjoyed the full trust of Finance Minister Dr Abdul Hafeez Sheikh, he still decided to quit.
He has claimed "differences of opinion on policy actions and on implementation of certain directions" which, according to his judgment, "he did not consider to be prudent or consistent with the integrity of the State Bank". Since he is a professional of a high integrity, his exit will not only send a negative signal to financial markets but also raise questions in the minds of persons in multilateral institutions dealing with Pakistan.
The negativism emerging from Kardar's departure at this critical juncture may raise doubts about Pakistan's commitment to fiscal and other structural reforms. International lenders and investors are not fond of frequent changes at the top. They only feel comfortable with those people who show deep understanding of issues and display strong signs of lasting longer. Besides, too frequent changes at the helm of the SBP could adversely impact the morale of the staff, its efficiency and continuity of banking policies.
Our politicians and professionals, unfortunately, do not adhere to requisite norms in Pakistan. Kardar, after his unpleasant session with the President, on Monday, directly went to his hometown Lahore instead of coming back to Karachi. He should have called an emergency meeting of Central Board of Directors and should have also met the senior management of SBP. He was also expected to take them into confidence prior to his resignation. For five days he has been incommunicado with the Central Bank, contributing to confusion and uncertainty about the situation. This need not be so.
What has actually constrained Kardar to take such an unsavoury and difficult decision at such a crucial juncture in the history of the country would probably never be known. Nevertheless, one can make some good guesses about the events that led to his exit. Since 2007-08, Pakistan has been experiencing a double-digit inflation and the State Bank rightly considers the persistence of a large fiscal deficit as the villain of the piece.
It's common knowledge that growing fiscal deficit forces the government of the day to rely increasingly on borrowings from the banking system to finance the widening gap between its revenues and expenditures. Commercial banks are investing a large part of their investible resources in risk-free government papers, which do not only increase lending rates but leave little room for private sector to meet its needs. Such a situation adversely affects the economic growth rate and encourages complacency in banks.
State Bank is of the considered view that the monetary policy has now become a hostage to fiscal imbalances and has to bear most of the burden to maintain price stability in the country through reduction in credit to non-government sectors and upward adjustment in interest rate structure. As the situation worsens, the tone of the State Bank in its documents and other policy statements also becomes louder and harsher.
Coincidentally, during Kardar's term, the message from the State Bank has been quite loud and clear due to continued deterioration in several key indicators. Unfortunately, however, the government has not taken it kindly. The persistence of the State Bank to keep the limit of government borrowings at end-September, 2010 level seems to have particularly irked the government.
There were also differences between the government and the State Bank about certain clauses to be excluded from or incorporated in the State Bank Act, which is yet to be approved by the National Assembly. Certain powerful political circles were also not happy with the State Bank's attitude towards Sindh Bank.
They were reported to have pushed the President to show his displeasure on the way SBP was failing to come up to his expectations. Political leaders' priorities are always to be first elected, complete their tenure in office and undertake decisions that can make them re-electable. Therefore, their priorities - more often than not - do not coincide with the outlook of technocrats and professionals. If the President is very keen on a Currency Swap Arrangement with China and Turkey then the SBP has to go the extra mile to do so. Anyhow, whatever the reasons, this is indeed a sad development.
It is often remarked that the central bank's relationship with the government, or more appropriately with the Ministry of Finance, is that of a nagging wife. But nagging within reasonable limits is always better than getting a divorce. In our view, it would have been better for Kardar to adjust himself better in his new position and try to make a difference in the policy formulation with strong determination and perseverance.
Of course, one has to be very tactful in the government bureaucracy to make a mark in the design of proper policy framework, but he or she is expected to show adaptability and flexibility in country's larger interest. On the other hand, the President and the Prime Minister also need to listen to the captain of their economic team - the Finance Minister - carefully and be above party politics to benefit from the services of talented professionals who are unfortunately in short supply.
After all, Finance Minister Dr Hafeez Sheikh can only deliver with whom he can work comfortably and repose full confidence in them. Hopefully, the government will be able to find - albeit with some difficulty - Shahid H. Kardar's successor, who is competent and can be retained for the full term as provided under the State Bank Act.
The key challenges that SBP faces are financial stability and rising inflation. In a developing country like Pakistan, it has an added role to perform - a development role. An economist as a governor is favoured by many - provided he can be assisted by someone who understands the intricacies of finance and nuances of banking industry. On the other hand, a banker with reasonable understanding of economics - supported by a team of economists in SBP - can also perform satisfactorily.
There is no perfect solution. But above all else the governor needs to have administrative experience to run a key and vital institution of over 8,000 persons. About a year ago, Kardar was a good choice for this job. The son of highly respected Pakistan cricket team captain, the late Abdul Hafeez Kardar, should have avoided being run out in one of the most crucial innings of his career.
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