Consider, she’s the first woman to be named governor of the central bank in Pakistan’s history. That has automatically given her a lot of good press even before she’s assumed office. Women’s rights groups have welcomed her appointment, the media has bannered it and indeed the country has taken the news as a sign of great progression.
Then, Dr Akhtar is taking over in relatively stable times. The economy is on a strong growth path, the exchange rate has long overcome its days of wild fluctuation, the financial system is at its best, and a plump cushion of reserves makes for a great level of comfort.
Compare this with the time Dr Husain took charge: economic growth was sinking, reserves barely hit $1 billion, the currency was on a roller coaster ride and Islamabad hovered on the brink of sovereign default. He had his work cut out for him and coming as he was from the World Bank had to battle his share of perception problems as well.
Moreover, Dr Akhtar takes over an institution that has undergone significant reform. Employees have been dragged through an educational process that has made them, for the first time ever, aware of their role and responsibilities. Systems have been overhauled and modernized. And perhaps most importantly, the State Bank has developed over the last six years a process of data collection and dissemination that has changed the way the economy is assessed in Pakistan.
The central bank’s data is credible and regular and its analysis independent and thought-provoking. And this achievement carries perhaps even more significance than the central bank’s contributions to reforming the economy, especially since the government’s own statistics body, the Federal Bureau of Statistics is yet to undergo the reform promised.
But while Dr Akhtar has the stage set for a smooth transition and a positive start, she will be confronted with her own unique set of challenges. And the extent to which she meets them successfully is what will determine how triumphant and celebrated a governor she will be.
Her first task in this tumultuous monetary environment will, of course, be the battle against price pressures. The rate of inflation, as measured by the consumer price index, peaked at 11.1 per cent year-on-year in April 2005 and has since declined to around eight per cent on-year in November. This has largely been on account of moderating food inflation which has eased from 15.7 per cent in April to 5.8 per cent on-year in November.
However, non-food, non-oil inflation remains around the same levels at 7.6 per cent. The worry now is that since CPI has moderated from its highs, the economic team is becoming complacent that the inflation problem is over. Indeed, the State Bank’s tightening of monetary policy from earlier this year has helped but not enough. As ABN Amro’s Economic Bulletin for December says, real interest rates are still near zero and “the State Bank is clearly ignoring the impact of easy monetary conditions on the balance of payments.”
The current account deficit has widened to $1.4 billion in just the first quarter compared to a surplus of $0.1 billion in the same period last year on account of a rising trade balance fuelled by rapid growth in imports, primarily of consumer goods. So, the new governor will have to begin work with an assessment of the monetary conditions and preserve enough autonomy to battle inflation with great aggression.
At the same time, she must study carefully how to control the current account deficit and work with the finance and commerce ministries to strike the right balance so that monetary policy is effective. This fight will inevitably have to include war against cartels and price manipulation by the private sector.
The problem of an unfettered private sector was recognized by the former leadership of the central bank (unlike the government which repeatedly denies the existence of cartels) but the SBP will now have to use its independence to force this issue to be addressed.
Stronger regulatory control over the private sector will help significantly in the fight against rising prices. Another challenge for the new governor will be working effectively with the economic team to maintain and accelerate growth. After GDP growth of 8.4 per cent last year, already this year the government’s seven per cent target is threatened by lower cotton production.
The cotton crop is unlikely to be more than 13 million bales compared to 14.3 million bales last year and will clearly miss the target of 15 million bales. Growth will also be threatened by a possible rise in global oil prices. The IMF has already said that global economic growth will slow owing to soaring oil prices and studies show it will be further threatened if oil prices average $70 per barrel next year.
In the post-earthquake period, the central bank will also have to play a critical role in guiding the economy out of a difficult time and onto a path of steady growth and financial stability.
The SBP chief will also have a major role to play in taking financial sector reforms to the next level. She is fortunate to inherit a financial sector that has been greatly strengthened by successful privatization, reform and modernization and consolidation as well.
However, the time is now ripe to move to the next stage of reforms in the financial sector including enforcing the introduction of sophisticated financial products and instruments into what remains a fairly rudimentary banking system. Along with that, the new chief will have to continue to implement stringent compliance of regulatory requirements and help steer greater consolidation within the financial sector.
The ultimate economic aim of poverty reduction will also become part of the new Governor’s parcel of responsibilities. Indeed, given her experience running the South East Asia department of the Asian Development Bank, perhaps she can bring to the table a desperately needed fresh look at how to battle poverty, especially in rural parts of the country where conditions have worsened over the last few years and which have remained completely untouched by the economic progress recorded during the period.
Finally, internal matters relating to the State Bank itself will be another area the new governor will be confronted by. In addition to continued modernization, upgrading and staff training, perhaps her greatest task will be developing a system to induct a new cadre of young, highly skilled employees into the bank in an effort to create an entirely new class of regulators for the future from within the system.
Given the routine frequency with which top regulators have to be brought in from abroad or from outside the system to run the country’s major regulatory bodies, it would be a welcome move if an effort is made to develop a system which begins to generate this class of workers.
Dr Akhtar would also do well to continue to build on the very solid base of economic research she will receive from her predecessor. Building on the frequency, variety and quality of the research reports released by the State Bank along with a greater effort to translate the reports for the media and the public at large will foster a deeper understanding of the economy and its problems.
In initial remarks, Dr Akhtar has said that her initial tasks will be maintaining economic and financial stability, continuing the policies of her predecessor and then examining the issues surrounding the economy and financial system before she develops a plan of action. Fair enough. She will have enough time to absorb the extent of her overall challenges as governor.
However, what will be most critical in her role as the new governor of the State Bank will be autonomy and independence of views. If she is able to firmly maintain that, against a fairly thick stack of odds, she will not only be more successful in her delicately balanced fight against inflation but will be far better prepared to meet her other challenges as well.