Thriving with deregulation

Jan 23 - 29, 2006

Dr. Shamshad Akhter, the newly appointed Governor of the State Bank of Pakistan (SBP), carries a high profile professional background to her professional credit, looked cool, composed and confident while outlining her vision regarding future direction of the central bank in her first appearance before media after assuming the prestigious office.

The State Bank of Pakistan under its policy to contain the mounting inflationary pressures had made some adjustments in the discount rates for the commercial banks which ultimately resulted in increasing the mark up rates. Its effect was followed on all sorts of advances including house financing, export re-financing, consumer financing and the leasing charges.

Whether the policy of increasing mark up rates produced the desired results or not, the fact remains that higher interest rates had an adverse impact on the otherwise growing construction and housing industry, exports of certain textile items especially the knitwear industry where usually small and medium size enterprises are involved, besides stalling impact on booming consumer market.

When PAGE invited the attention of the new SBP Governor towards the policy of increasing interest rates and its outcome, she referred to the official Consumer Price Index observing that food prices have reasonably come down and the inflationary pressure has also been checked effectively.

Dr. Shamshad Akhtar was of the view that inflation in the country, according to her observation after studying figures of the Federal Bureau of Statistics, was on decline due to a variety of structural measures. Those measures have been taken to ease the shortage of supply of some sensitive commodities and those adjusted are bearing fruit to bring down the inflation. She observed that prices are recording a downward trend, so clearly there is no need for adjustments causing occurrence of some correction within the economy.

On the question of mushrooming of bank branches all around the major cities, Dr. Shamshad was of the view that she sees no harm in increasing the number of bank branches as she feels that the country was still under served as far as the bank services were concerned. Now the situation is quite different from what it was in the era of nationalization. The banks are performing pretty well under the umbrella of private sector and it is up to the management to look into the viability of the branches. In fact the growing number of bank branches is a strong indicator that the banking system in Pakistan is thriving on the back of economic and liberal and deregulated financial policies of the present government.

The new governor also asked her Deputy Governor Tawfiq Hussein to give his opinion about what is called mushroming of new branches and their effect on the banking sector growth. The Deputy Governor SBP came out with the remarks that in the nationalized banking era, the banks had opened branches without a comprehensive market study regarding demand for the branches and in some cases the branches of the same banks were competing each other within the same locality.

However, the practice of opening new branches is a commercial decision taken by the Board of Directors of the private banks and SBP cannot intervene since no law is violated.

The governor also referred the question of banks' penalizing by imposing charges on customers for various services. Tawafiq said that some banks did levy them but around 10 banks have not imposed service charges. So the customers have the choice to select a bank of its merit. However, he added that they were not in favor of imposing any charge on basic banking services.

Dr. Shamshad Akhtar before joining the ADB, worked for 10 years as an Economist in the World Bank's Resident Mission in Pakistan. She also worked briefly with the Planning Offices in Pakistan both at the Federal and Sindh governments. During her stay in Pakistan, she dealt with wide ranging subjects which covered analysis of macroeconomic situation, finance and money and structural reforms of key sectors including industry and agriculture. Her work included papers on taxation system of Pakistan, state of inter-governmental fiscal relations, poverty incidence & its dimensions and foreign direct investment etc. In Pakistan, she also contributed to the development of diversification of financial markets including the analysis of monetary policy and state of banking industry (at the World Bank) and restructuring of the Securities & Exchange Commission, Insurance Commission and worked closely with the private sector including the stock exchanges. She has been advising the central banks on reforms of financial markets. Dr. Akhtar has also been dealing with the banking sector's legal, regulatory and institutional reforms while advising on diversification of the industry to exploit long term funding through development of bond market.

Born in Hyderabad, Dr. Akhtar had her earlier education at Karachi and Islamabad. She has had an excellent academic record. She graduated from the University of Punjab with a B. A. Economics degree in 1974. Dr. Shamshad Akhtar has a MS in Economics from the Quaid-e-Azam University, Islamabad, an MA in Development Economics from the University of Sussex in 1977 and a Ph.D. in Economics from the UK's Paisley College of Technology in 1980. She is a post-doctoral fellowship Fulbright Scholar and was a visiting fellow at the Department of Economics, Harvard University in 1987.

Dr. Akhtar has presented numerous papers on economics and finance at international conferences/seminars/symposia. Her research interests are on Monetary and Fiscal Policy, Banking and Capital Market, International Finance Architecture, Regulation and Supervision, and Industrial & Corporate Restructuring.

Expressing her views on the level of the banks' exposure in the capital market, as in India it was about 5 percent as compared to 20 percent in Pakistan, she said that she was still assessing banks' exposure in the capital market. The Governor however assured that she would see to it that banks' involvement in equities does not cause undue speculation in a negative sense. She would only have a firm view after a detailed study of the issue, she said firmly.

She believed in working with the Securities and Exchange Commission of Pakistan (SECP) with amity, without creating any ripples. SBP has to remain involved in institutions taking deposits from the public. Therefore, it has to work closely with the SECP, regulating the non-bank institutions.

The central bank would only intervene when some kind of discrepancy is found against SECP's functioning.

She would see that the market was not stifled, she assured.

In fact she was responding to a question about the on-going tussle between SECP and Karachi Stock Exchange on the election of Chairman of KSE. However, she added that she was not much familiar with the present scenario in the capital market but would take stock of the situation and might be able to say something on the issue after sometime.

When asked if SBP having access to banks data, and was it forwarding it to the Central Board of Revenue? She replied in a clear "No", and added that we are keeping the data with ourselves within the law of secrecy of individual accounts. We only disseminate data regarding credit utilization and growth in accordance with the good business practices prevalent all over the world.

It may be mentioned that the new monetary policy will be announced on January 26 by SBP. When asked about the broad features of the forthcoming policy she observed it would broadly highlight the growth rate assessment, inflation and banking sector reforms.

The decision was taken in a meeting of the Monetary and Fiscal Board last week, which discussed the broader aspects of the national economy that indicated overall growth rate assessment, by the SBP.

It may be mentioned that Prime Minister Shaukat Aziz has asked the State Bank of Pakistan to maintain a balance between promoting and reducing inflation as a lax fiscal policy can create difficulties for SBP monetary policy.

The Monetary policy, it may be mentioned, is due on January 26. Speaking at Monetary and Fiscal Policies Coordination Board, Prime Minister Shaukat Aziz was of the view that we must have good coordination between monetary, fiscal and exchange rate policies, for which the Board provides an excellent forum.

Pakistan's economy continues to perform strongly owing to the prudent macroeconomic policies being pursued, wide-ranging structural reforms implemented, fiscal discipline maintained and consistency and continuity being ensured. These policies have contributed to a marked improvement in productivity and in consumer and investor confidence leading to growing overall domestic demand, which should help support growth at a robust level over the medium term.

The impressive performance being shown by the banking sector reflected in the magnitude of the credit to private sector which continued to exhibit strong demand as it borrowed Rs253.2 billion as against Rs244.4 billion in the same period last year, which reflects the private sector's growing confidence in the macroeconomic environment prevailing in the country.

In the present scenario, Pakistan's economy had faced headwinds from rising energy prices, touching all time high at over $70 per barrel at the beginning of the current fiscal year. The economy was further struck by massive earthquake of October 8, causing widespread destruction of area and loss of human lives. These two developments have had a limited impact on the growth but the capacity of the economy to absorb shocks of such magnitudes is not unlimited.

Overall inflation was on downward trend as it registered a decline from 11.1 percent in April 2005 to 7.9 percent in November 2005. Most importantly, food inflation registered a sharp decline from 15.7 percent to 5.8 percent in the same period. The average inflation for the first five months (July-November) stood at 8.4 percent as against 9.1 percent in the same period last year. If the current trend continued, an 8 percent target was likely to be achieved for the year.

Both exports and imports were growing at high double-digit level. Exports grew by 22.9 percent and imports were up by 54 percent on the back of rising oil bills and continued strength of non-oil imports owing to buoyant domestic demand.

The trade and current account gap had widened to $4.55 billion and $2.8 billion, respectively.

The large-scale manufacturing also continued to maintain its momentum. The other components of the national accounts were likely to over perform hence there are strong indications that the overall growth target of 7 percent is likely.

Regarding any change in SBP strategy 2010 complied by former Governor Dr. Ishrat Hussain, the new governor said basically the strategy is very broad based and there are lots of micro details within its implementation that one needs to look into. The strategy provides a broad umbrella, the approach and the direction that the Central Bank is going to take. "I do respect my predecessor tremendously who left behind a very good State Bank and banking industry and I would like to ensure that there will be very much continuity of the broad policy direction. She pointed out that obviously there were a lot of technicalities within the strategy context, adding, when we are implementing those plans one will be able to see the flavor of direction in the years to come.

Dr. Shamshad believes in broadening and deepening the reform process in any country as she has been advising several governments on economic reforms both on micro-finance and the financial sector funds. So she would like to carry forward the spirit of reforms and ensure there is continuity in spirit but definitely would like to talk more on deepening the impact of our reforms and implementing specifically in letter and spirit.

The SBP Chief was of the view that not only Pakistan but also whole of Asia could do more on legal and regulatory reforms by making the services available. It was the responsibility of SBP to make sure that the small and medium size enterprises and micro-finance industry is promoted effectively for providing the right kind of incentives and right institutional framework and leave it to the market to service those requirements of the economy.

Without any hesitation, the new governor admitted that currently she was taking stock of the situation that where we stand and get to know about the Central Bank, get to know about colleagues. There are so many people in the Bank and she needed to understand who's doing what so that she may be in that mode. There are a lot of high priority areas that require urgency and need to be tackled because the Bank was without a governor some weeks.

She asserted that her initial reaction after assuming the charge of the Bank is to ensure continuity of the policies and strategy of the Central Bank and to ensure effective implementation of the reform agenda, this is the right direction she would like to take forward, she observed.

However, the strategy would be examined at different stages to see if they were still valid. There could be a change in the policy if the situation demanded. She, however, complimented her predecessor Dr. Ishrat Hussain with the comments that he had left the Central Bank in a good state of health.