September 16, 2002	Monday	Rajab 8, 1423

In a country in which until recently the government used to borrow heavily from the State Bank of Pakistan at half a per cent interest and double digit inflation was prolonged, should the State Bank of Pakistan be made totally autonomous and its governor given a five year term instead of three years?

This proposal has been put forward by the governor of the State Bank of Pakistan, Dr Ishrat Hussain, with the stipulation he should have only one term for five years instead of going soft before the end of three years in an effort to please the government and get his term extended for another three years. Dr Ishrat Hussain’s term comes to an end in December but he has made it clear his suggestion is not person specific, but a proposal good for the central bank and the healthy monetary policy of the country. But whether extending the governors term for five years and making the State Bank autonomous on paper will solve the monetary problems of this country is a question that remains to be explored.

The demand for a fully autonomous the SBP to regulate commercial and other banks and lay down the monetary policy with its varied shifts is supported by almost all the parties in the country and the international donors including the World Bank ADBP and the global monetary watchdog IMF and that is the universal concept too at a time of floating currencies instead of fixed exchange rates of the past. Now the market fixes the rate and the central bank intervenes to keep it healthy and beyond the mischief of interested elements.

The PPP has now come out strongly in favour of full autonomy for the SBP. In its 35-point agenda for the future which seems drafted more by the Karachi Chamber of Commerce than its own economic experts. It says, “The party does not agree with the kind of autonomy the SBP enjoys. The PPP will make the SBP hundred per cent autonomous’ and provide constitutional protection to the central bank.

A large leap from the days of Zulfiqar Ali Bhutto with Dr Mubashir Hasan as his finance minister, who had stopped the valuable annual report of the SBP arguing that the bank had no private sector shareholders and hence there was no need for the annual report. The fact is the people of Pakistan as a whole are the shareholders of the bank and the report was a very useful annual stock taking and the report on the economy as a whole was very helpful to the economists and economic writers.

The authority of the central bank has been increasing step by step following the deregulation of the bank in the 1990’s by the Nawaz Sharif government. But the governors Dr Yakoob from the IMF and Dr Ishrat Hussain from the World Bank did not have unfettered authority all the time in those tumultuous times. Family in an effort to assert the authority of the finance minister in this area by creating a council for fiscal and monetary matters in which the Finance minister will be the chairman in order to make the fiscal policy more tandem and not collide with each other.

In the US the term of the chairman of the Federal Reserve is five years which is renewable. As a result Alan Greenspan has been in office for the last fifteen years beginning 1987. He was appointed by George Bush Senior as president and re-appointed by democratic president Bill Clinton and has continued under George Bush junior. When the economy was doing too well in the 1990s and his interest rate policies were credited, with that nobody wanted to remove him. The term of the federal open market committee members who vote on the interest rate is fourteen years which is a half a life term. But many members resign before completing the fourteen-year term.

The other famous central bank is Germany Bundas Bank. It was said that Germans have faith only in two institutions, God and the Deutsche Bundesbank.

The Bank of England though influential is not as powerful as these two other western banks. The functions of the central bank have increased manifold compared to what they were over ten years ago. Hence the bank needs a strong governor along with a strong board which meets frequently and long enough to set policies instead of merely endorsing the official policies. The bank has now come up with guidelines for deciding the money supply or changes in money supply each year along with the ceiling on credit to the government, the public sector and the private sector. It is also to set the appropriate interest rate from time to time to accelerate economic growth and counter recessionary trends.

The central bank has also to regulate the proper functioning of commercial and other banks and prevent malpractices of the past which resulted in the closure of many banks. The government is now also a watchdog of the monetary reserves and has built up the reserve of $7.4 billion and when the exchange rate fluctuates due to manipulations of the operations of the new exchange companies, the bank has to intervene and steady the course. These are complex tasks and the bank does not have adequate number of personnel to handle all these tasks efficiently and in good time. So it has to build the requisite team to be on the ball all the time.

The man who may come in to conflict with the governor who exercises his authority in full can be the Finance minister whose monetary role can be reduced. Mr Shaukat Aziz has been able to get along pretty well with Dr Ishrat Hussain — possibly because both were bankers working in the US. The same team spirit may not be easy when the players change. But the finance minister to come has to get accustomed to an independent governor instead of expecting one to play second fiddle. In such a context it may be proper to give the governor a five-year term beginning with two years more for Dr Ishrat Hussain and make the five year term a reality without a second term.