FOR the second consecutive time, the State Bank is going to be headed by someone who first inherited the position after it fell vacant following a premature resignation, and then was confirmed at the last minute.

It appears that a trend that began in 1993, when Dr Muhammad Yaqub was brought in from the IMF, has now ended definitively this week with the appointment of Mr Wathra as the new governor of the second most powerful financial position in Pakistan.

Mr Yaqub’s arrival at the State Bank in 1993 had started a tradition of firm and independent governors. He had played a key role in guiding the legislation that brought about the central bank’s independence from political influence. Of course, the legislation did not end the political influence, but it certainly helped stem the rising tide of interference in the regulator’s affairs by political players.

The hard-fought independence came slowly, and helped bring an end to the grievous harm that had been done to the country’s financial sector by actions such as politically motivated loans and the grant of a banking licence to an individual like Yunus Habib.

Up until the ’90s, the central bank had been run by CSS officers, and Ghulam Ishaq Khan had a big role in choosing them all. The results were there for all to see when the famous list of loan defaulters was published, and when Mehran Bank was exposed as a scam and had to be merged with National Bank that was forced to absorb the losses on the failing banks’ balance sheet.

Politically motivated loans and their subsequent write-offs were the legacy of the years when the central bank was in the hands of a heavily politicised bureaucracy. The grant of a banking license to an individual like Yunus Habib, who went on to run a glorified pyramid scheme using a network of contacts in public-sector corporations to park funds in his bank which he would then dole out to favoured political clients, brought home the grievous harm that weak regulation could do to the financial system.

A tradition was established with Mr Yaqub’s arrival in 1993. Four of his successors throughout the subsequent decade were independent people, brought either from the world of multilateral institutions (Ishrat Husain and Shamshad Akhtar), from corporate banking (Salim Raza) or an independent chartered accountant (Shahid Kardar). 

In their own way, each left a mark on the practice of central banking in Pakistan. Mr Husain’s tenure has been criticised for being too accommodative of the government in terms of the conduct of monetary policy, but he injected new life into the research department and inaugurated an era of transparency by adopting far-reaching standards for the monitoring and disclosure of key economic data.

Thanks to his efforts, Pakistan’s central bank today maintains a very extensive and independently generated set of key economic statistics competitive with some of the best central banks in the world.

Of course, the story the numbers tell is another matter, but that is not really the State Bank’s fault.

Shamshad Akhtar’s tenure is remembered for the tough stand she took against speculators and other manipulative interests who had come to infest the financial markets. She struggled with them almost on a daily basis as she drove interest rates into double digits, raised capital adequacy requirements for the banks, urged an end to the damaging practice of in-house badla financing in stock market trades and sought to place limits on the exposure that banks could acquire in the stock market.

Due to her efforts, banks were able to survive the massive withdrawals of dollar and rupee liquidity that began to occur in massive quantities in the later months of 2008. Her fierce stand against special interests played a key role in ensuring that Pakistan did not crumble like a house of straw when the financial crisis inevitably arrived on our shores.

Salim Raza commanded the ship during those trying days, and worked closely with Shaukat Tarin in shaping Pakistan’s approach to the IMF that saved the day for our financial system. He also opened the door to mobile banking which promises to change the industry in profound ways in the years to come. Mr Kardar’s term — barely 11 months — was too brief to leave a legacy.

And with that, the tradition ended. Between Mr Yaqub’s arrival in 1993, and Mr Kardar’s departure in 2011— less than two decades — a tradition of having strong and independent minded individuals hold the fort in Pakistan’s central bank can be said to have ended.

It appears a new era has begun for the central bank. The latest appointee, and his predecessor, are both insiders. They have their share of private sector experience to show, but mostly found themselves holding the fort when their predecessor resigned and the authorities mounted a search for a successor. Failing in the search, the authorities confirmed the person operating in an ‘acting’ capacity as the deadline for announcing a new name approached. Governor by default you might say.

The era of people who came to the institution with strong ideas of how to shape it in a time of rapidly evolving challenges has now ended. Although we’re not likely to go back to an era of CSS officers commanding the biggest ship on Chundrigar Road, let’s not say that out loud. Because when conviction fades, superstition takes over.

The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.

khurram.husain@gmail.com

Twitter: @khurramhusain