SBP Autonomy?

As I write this article it is not clear whether the State Bank of Pakistan (SBP), the institution responsible for and the regulator of the banking industry in Pakistan and the monetary policy of the country, and thus most of the capital markets of the country as well, has a governor or not.

SBP was supposed to be an independent and autonomous institution with its governor having three-year guaranteed terms. But it seems that the government of the time cannot live with that. This is the second governor who is going to be leaving the post in less than a year. There are people who are still trying to patch things up between the government and Mr Kardar, but whether they succeed this time or not, and the outcome maybe clear by the time this article goes into print, the basic fact remains that there is a degree of inevitability about the outcome. If it does not happen now, it will happen in a few months.

It has been known for sometime that the governor had differences with the political government and some of its policies for the last many months. In fact, it is a surprise that it took so long for this to happen. It could have happened a few months back as well, or for that matter, at any time in the middle as well.

When Mr Kardar was appointed as the Governor of the State Bank I was a bit surprised. Mr Kardar is a very well regarded professional who has a deep understanding of the Pakistani economy. He has been working in Pakistan for decades. But he is also known for being a person who speaks his mind and who defends his point of view. I could understand why the government, at the time desperately looking for a good appointment to the post so that negotiations with IMF and others could continue, would want to appoint a person like him, and I could understand why Mr Kardar, as a citizen wanting to do something for the country, might have wanted to take the opportunity to serve in this important position, could lead to such an appointment. But this also explains why such a marriage would be a short one as well.

Mr Kardar would have bent so much but only so much. The government would have taken so much, in terms of criticism and/or disagreement, and only so much. So a break was/is inevitable. The only uncertainty that remains is which particular straw would break the camel’s back. The question now is has the back been broken or could it be patched up till the next straw.

The financial situation of the country is not hidden from anyone. Large fiscal deficits are inevitable and given the relative inability of the government to raise funding from abroad, the burden of financing the deficit is going to fall on domestic markets. And the State Bank is not going to like that. It will want to limit the government’s ability to borrow domestically, and it would also want to limit the inflationary impacts of deficit financing. But the government is in a tight spot too. How much expenditure can it trim? It is going to be facing the electorate soon. And the financial situation, in terms of inflation, unemployment, and lack of growth, is very poor. How can it clamp down on the expenditure side to the extent that economic prudence, from SBP point of view, would dictate?

There have been other irritants too. When the PPP government decided to set up the Sindh Bank, it could not have been easy for the governor to give his consent. The government is trying to get rid of the enterprises it has, and has gotten rid of almost all banks, our experience with provinces having banks has been particularly bad (look at both the Punjab Bank and the Khyber Bank) and even the DFI experience has not been anything to write home about, the banking industry is going through a tough period as well and needs consolidation, if anything, how can the government justify a new bank? And why should a province have a bank? Some insiders have tried to justify the Sindh Bank by saying Punjab has one too. But this is one of the silliest arguments that one can make. Punjab did something stupid, is it necessary for Sindh to follow?

The issue of what will come next will be interesting. If things get patched up, Mr Kardar might stay for a few months but the rupture will come. And then the political government will probably keep an ‘acting’ governor as long as it feasibly can and then bring in a person who would be more amenable to agreeing with what the government wants. And there are plenty of commercial bankers and ‘friends’ of the President who will fit the bill and would be more than happy to oblige. SBP’s autonomy and credibility will get tarnished, as will its competence, and this will have repercussions for the banking industry as well as the health of the economy. But who cares about that?

The political government is in the game for the short term and its goal is managing things to complete its political term and go into the election in as good a position as it can. SBP reputation and credibility be damned.

The only reason the government might continue with Mr Kardar or replace him with another well regarded person would be if there was pressure from multilaterals and/or outsiders or if the government felt it needed such a person to manage its international relations and/or image. But this constraint has become a lot weaker in the last few months so it is unlikely to be a deciding factor. We should get ready to welcome a banker friend of Mr Zardari to become the regulator of banks and custodian of the country’s monetary policy. Let the fun times continue to roll on.

From Pakistan Today, Pakistan, Tuesday July 19th, 2011


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