DAWN - Cowasjee Corner; 30 January, 1998

The State Bank

By Ardeshir Cowasjee

A LEADER of a nation is supposed to lead, using wisdom derived from experience. Through his conduct and his acts of omission and of commission, he must set an example. For our sins, once again we have a leader in the form of our prime minister, who squanders the wealth of this nation of 140 million, the great majority of whom are poor and deprived.

Nawaz Sharif drives around Islamabad in his 500 SEL Mercedes Benz, the spare car that follows him is also a 500 SEL. His police escort follow him in three Mercedes, equipped with flashing roof lights. Should such a prime minister collect money from schoolchildren and pensioners supposedly to redeem the debt of the nation?

For Nawaz Sharif, laws are neither applicable to him and his cronies nor are they observed. He believes that his majority gives him the right to amend the Constitution at midnight, without debate or discussion. He believes that he can make laws and also break them. He cannot tolerate the independence of any institution.

He first tackled the presidency and deprived the country of the checks and balances that this office provided. Then came the tackling of the Supreme Court - we know what happened there. During a recent Supreme Court hearing, one of the honourable judges was bold enough to inquire from the Bench as to what is the public perception of the judiciary. The law-abiding senior advocates, and those sitting in the court, politely answered the question silently, with averted eyes.

The assault on the press has begun and is being mishandled by the minister of information.

Only two institutions of the state are now left with any semblance of autonomy - the military and the State Bank. We will see what happens to the army when the term of COAS General Jehangir Karamat ends.

Now to the subject at hand. The autonomy of the State Bank is about to end, after a year of anemic existence. Governor Mohammad Yaqub is being readied for the chop. Since he holds a statutory position and cannot be sacked, the plan is to force him to resign.

The prime minister and his financial advisers are making no effort to assimilate the basics of good government. The people recommend they rethink their policies.

A modern and progressive state is founded on a diversity of institutions and a decentralized system. Excessive centralization exposes the state to the inherent limits of an individual, or a single institution. Hence, for example, it is vital to have independent metropolitan authorities, independent local governments in the rural areas, and, most importantly, an independent central bank.

Beneath the superb recent economic performance of the United States is an independent Federal Reserve. The chairman is appointed by the president, but is independent of him and cannot be sacked by him. His term is fixed and the executive cannot interfere in the policies of the Federal Reserve.

Tony Blair, on becoming prime minister of Britain, made the Bank of England independent of himself and the Treasury. The independence of the Bundesbank in Germany is decreed by the German constitution. After their economic crises, Mexico, Chile and Argentina also legislated the independence of their central banks.

One of the major reasons for the current crises in Korea, Thailand and Indonesia is the politicization of their central banks which did not adequately regulate their banking systems. They became a part of East Asia's "crony capitalism."

In Pakistan, the first attempt to make the State Bank independent was made by Moin Qureshi and his caretakers. Benazir Bhutto and her men, guided by greed, arrogance and ignorance, reversed the change. The Leghari caretakers passed an ordinance decreeing the Bank's independence. Nawaz Sharif's government which followed concurred and confirmed the ordinance by an Act of Parliament. But now, Nawaz Sharif wishes to disregard his own law.

In the past, during Benazir Bhutto's second round, Yaqub may have sinned by sitting back while the banking system was being plundered. He had sufficient powers to have at least dammed the plunder, but his main sin was that he feared fear. He is not a corrupt man, nor is he greedy. On the credit side, he knows the mess we are in. Since this government's pretended affirmation of the State Bank's autonomy he has been systematically candid and courageous in giving the public cold facts and sound analyses on the economy, and in giving independent advice to the government.

He has been forthright in the councils of government, warning against the dangers of deficit financing and excessive borrowing. Unfortunately, he has not had the support of the finance minister, whose sole aim from the beginning of this year was to be as obsequious as possible as he was vying for the presidency. The Deputy Chairman of the Planning Commission, Hafiz Pasha, is a competent economist who knows what needs to be done, but is too fond of his job and remains silent.

Finance Minister Sartaj is committed to the dubious 'supply side' economics, arguing that deficit financing would help activate unused capacity. Little does he understand that much of the 'unused capacity' is unusable. All he has given the country is inflation and near bankruptcy.

Yaqub's recently acquired strength, candour and forthrightness has made him unpopular with the prime minister. The matter came to a head at a nationally televised conference in Islamabad on January 20, where some two hundred representatives of the private sector advisory council had gathered. The conference was organized by MNA Humayun Akhtar, Chairman of the Board of Investment. All that Akhtar has to his credit is that he is the son of a former Lt. General of the army. He inspires no confidence either in potential foreign investors or in those of his own country. He should not be where he is.

At this conference, the finance minister and the deputy chief of the Planning Commission held their peace when a few gentlemen of the private sector, amongst them defaulters, complained about not getting low interest loans for their projects. The prime minister asked Yaqub to explain. Yaqub had the temerity to suggest that deficit financing and not the State Bank was the cause of high interest rates. He also suggested that defaulters should repay previous loans before asking for new ones. For this he was publicly humiliated by our chief executive who snubbed him, scornfully disagreeing with him. All that Nawaz Sharif cares about is that he and his politicians, defaulters or not, should be given more and more long-term project loans at very low interest rates irrespective of what they can or cannot pledge.

Does the prime minister know that 50 per cent of projects built with loans have failed, that the best recovery of money by the banks and financial institutions is only some 30 per cent, that the inflation rate, though officially declared to be 12 per cent, is 18 per cent, that this country's rate of saving is one of the lowest in the world (around 11 per cent as compared to India's 20 per cent, China and Sri Lanka's 30 per cent)?

The pressure on Yaqub to resign is planned to be exerted after the IMF mission has come and gone in March. He has been 'strongly' advised to go without making waves. He is obviously an obstacle to "crony capitalism" of the Indonesian kind. Resign, he must not, and the people should support him.

As to the IMF, Nawaz Sharif should not worry. As things stand today, we will be saved. Informed sources have it that the political handlers of the IMF have already decided to release the next tranche of their loan to Pakistan, come hell or high water. They will accept lapses in Pakistan's performance and fabricated figures, for they do not want another meltdown in Asia after Indonesia, Korea and Thailand.

Nawaz Sharif believes in the privatization of banks but not in the functioning of monetary and banking institutions without political interference. World Bank President, James Wolfensohn, following his visit to Pakistan, said that the only sensible finance men he met, who were doing their jobs correctly, were the three young Pakistani bankers, Shaukat Tareen (Habib), Ahmed Mian Soomro (NBP) and Zubair Soomro (UBL). But, on a daily basis, these men are harassed by various politicians and asked to let defaulters off the hook, and to grant loans to those in power and their cronies and creditors.

World Bank senior banker, Neils Minners, in charge of finance and private sector development, visited Pakistan in mid-January to look at the privatization process. He was happy at the manner in which Habib Bank, the first on the block, was being handled. But he agreed that the family silver must not be handed out to cronies at a throwaway price. HBL just cannot be fairly privatized by March this year, as is being insisted upon by Nawaz Sharif and his Privatization Commission.

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