SHAMSUL GHANI (shams_ghani@hotmail.com)
Jan 26 - Feb 01, 2009

January 17 newspapers carried reports regarding new monetary policy announcement on the last day of the month. The upcoming policy announcement generated a lot of interest in the business and industrial circles; firstly, because it was going to be the maiden policy announcement by the new State Bank governor and secondly, because of the air of expectancy about the change in the interest rate. The policy, as a whole, has evoked interest of every segment of the economy. The analysts and economists are busy since long in airing their divergent opinions on the contents of the policy especially the interest rate issue that has bogged down our economy. Majority of them believed that the policy will be drafted under the influence of the agreement with the IMF and thus any cut in the interest rate was out of question. Of late, the interest rate hike has attracted severe criticism from the business and industry people who wait in anguish for a cut in the rate.

Amidst the hours of hope and despair, January 20 newspapers spilled the beans by reporting the statement of the Federal Minister for Industries and Production according to which a summary for the cut of interest rate was to be produced before the federal cabinet. Talking to businessmen and industrialists at the Lahore Chamber of Commerce and Industries, the minister said that the existing high rates required to be reduced because they were not only increasing the cost of doing business but were also affecting competitiveness of the industrial products. The news brought some sort of relief to the all and sundry (according to the newspaper) on one hand, and put many in a state of shock and disbelief who thought that the monetary decision making was the exclusive domain of the central bank. The business of presenting summaries on monetary issues was a shocker that one could expect only from the uninitiated political zealots. Where does the autonomy of State Bank figure in their scheme of things? Will the newly installed political setup bother to explain?

January 22 newspapers brought yet another surprise. The government formally signaled maintaining of status quo on the issue of interest rate. The Dawn reported:

ěThe private sector which is under tremendous stress in Pakistan, heaved a sigh of relief as the rumor that the interest rate would not be increased any further was formally endorsed by the government before the official announcement of the policy by the new governor of the State Bank of Pakistan."

Government's recent involvement, particularly through the advisor to the prime minister, in securing the oxygenating deal with the IMF notwithstanding, the leakage of a major policy decision well before the announcement of monetary policy is a serious mistake. The decision, in any case, should have been the part of the monetary policy, and announced at the proper time. Till recent, the analysts used to talk of State Bank's relative autonomy; now it has turned out to be the case of nominal autonomy. It's not a good beginning for the new governor who has before him the goal of revamping the badly shaped economy. He will have to assert himself to send a message to those who have designs on him.

The oft repeated following paragraphs from this scribe's previous articles were perhaps never as relevant as they appear to be now. Who is more powerful - the elected president of the United States or the un-elected head of America's politically independent central bank? Steven Solomon, the author of "The Confidence Game" tries to answer this question in the scenario of 1987 stock market crash,

"The dilemma was that neither Washington's elected politicians nor Wall Street's top financiers possessed the tools for decisive, emergency leadership to forestall the crisis. Only one institution, and one man did, - the US central bank and its chairman, Alan Greenspan."

In the words of the then Treasury Undersecretary of Finance George Gould, "A president can say something, but he can't do anything. But the Fed has a well-established statutory position and the ability to do something."

Steven Solomon further writes, 'Central bankers' fingerprints are everywhere behind the daily financial headlines: the rise and fall of interest rates, the ups and downs of the dollar, the emergency rescue of a crashing stock market or a nation in crisis. But they themselves are rarely seen or understood except by an elite minority. Only a few such as the US Federal Reserve Board's Paul Volcker and Alan Greenspan and the German Bundesbank's Karl Otto Pohl, are well-known names; most citizens have never heard of the Bank of Japan's Yasushi Mieno, the Bundesbank's Hans Tietmeyer, or the Bank of England's Eddie George."

Coming back to the government nod for maintaining the policy rate of 15 per cent, the business and industry should have no reason to feel satisfied as reported by the newspaper. The growing demand for a rate cut is based on economic and financial logic. The economy cannot survive under the regime of an unusually high interest rate particularly in a very low-rate global environment. The government decision to forego any further increase is not invigorating by any means. Rather it is a bit sardonic. The mistake of overstepping the well-defined line between the fiscal and monetary realms should have produced at least something of real substance, may be a 200 basis points cut. Had it been so, the critics would have ignored the faux pas to join the euphoric business and industrial circles in appreciating the rejuvenating effect of the government decision. The maintenance of status quo would have been best left for the policy announcement which is just around the corner.