IMF & Priorities for new central bank governor
The past fortnight saw two important developments on the economic front. The negotiations with the IMF, which according to the outgoing Finance Minister were in the last stages seemed to be nowhere near the end. The agreement was not in sight due to divergent positions regarding future increase in tax collections, exchange rate flexibility, energy tariffs, and management of loss-making public sector entities among other factors.
Second, the Governor of the central bank was sent packing and a new person was appointed for the position whom the government felt was a better fit for this job. The government, of course, didn’t provide any reasons as to why the Governor was asked to resign well before the end of his constitutionally allowed tenure and at a time when negotiations with the visiting IMF team were still in progress. We also do not have credible information if there was pressure from any quarter to remove the central bank head.
The discussion among parliamentarians quickly turned toward another direction. The new central bank Governor was an IMF employee until recently and this according to our opposition parties has implications. Some believe that he may end up safeguarding his former employer’s interests more than the country. Others believe that he until recently was responsible to sell IMF program to Egypt and beg everyone to look into where the Egyptian economy stands today in terms of higher prices and stagnant wages which in turn have been painful for the poorest of the poor.
I have a very different take from what is currently being discussed on this subject. I believe that the problems facing Pakistan’s economy are structural. These require political will more than economic expertise. The solutions are all very well known. Therefore our starting point should be to see if the change in leadership is good for the central bank as an institution. Each time a new Central Bank governor arrived from international financial institutions, we did see the introduction of new ideas, technologies, and entry of capable human resource at the central bank. This is perhaps more needed now at the bank given the fast brain drain in the recent past.
Amid these difficult times, the central bank should continue strong on its plan for effective implementation of National Financial Inclusion Strategy.
Dr. Vaqar Ahmed
But let us also offer the top-three must-do things for the incoming Governor. Perhaps the achievement of these would be a first sign that he understands and is capable of helping the treasury in steering Pakistan’s economy through the painful adjustment period. First, he is expected to help the government finalize the deal with IMF. This is easier said than done. The new economic team will have to sell all those measures to the market which will keep Pakistan’s economic growth subdued for the next two to three years.
Second, force the democratic government toward fiscal discipline. With government borrowing, circular debt and losses of public sector enterprises (PSEs) at record high levels, the government continues to announce promises toward Ehsaas program, package for Karachi’s uplift, and another package for erstwhile FATA among other populist measures. All this at a time when revenue collection targets have been missed, proceeds expected from Pakistan Banao Certificates have not materialized and streamlining of losses of PSEs after the incorporation of Sarmaya-e-Pakistan company are nowhere in sight. The new Governor should not forget how some very experienced central bankers where sent packing during the previous tenure of Mr. Abdul Hafeez Shaikh for not accommodating such populist requests despite repeated assertions by the then government that SBP is an autonomous institution. A decent starting point could be for the new Governor to insist on the strengthening of Fiscal Responsibility and Debt Limitation Act 2005 which does not penalize the federal government if borrowing limits are breached.
Third, the new Governor is expected to help Pakistan rebrand its financial image in front of Financial Action Taskforce (FATF) which is still struggling to see if Pakistan has taken credible steps for coming out from the greylist. Already Pakistan has concerns regarding global illicit financing watchdog being politicized as India’s Finance Minister recently stated that they wanted Pakistan downgraded to FATF’s blacklist.
While the above mentioned would be important tasks on his to-do list, the Governor’s ultimate measure of success would be if macroeconomic stabilization can be achieved with inclusive growth. With strong cost-push inflationary pressures owing to the exchange rate and fuel prices and private sector credit indicating a declining trend, the implications for commodity producing sectors, export-oriented industries, and job creation are unfavorable. Amid these difficult times, the central bank should continue strong on its plan for effective implementation of National Financial Inclusion Strategy which in turn has potential to spur entrepreneurship and help the sustainability of startups and social enterprises in Pakistan.
– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.