Reforming the banking sector, moving towards an inflation-targeting regime and asserting the independence of the central bank. These are just a few of the jobs in the office in-tray of Shamshad Akhtar, governor of the State Bank of Pakistan (SBP).
Since her appointment in January 2006, the fiercely independent technocrat has sought to steer Pakistan’s economic rebound towards sustainable growth with diligence and unwavering vigour. To this end, she has adopted counter-inflationary monetary policies aimed at pacifying the country’s soaring monetary supply. These measures lie at the heart of her economic philosophy, she tells Emerging Markets.
“I have always advocated liberalization such as freeing up prices and interest rates. But I also fundamentally believe risk management needs to be suitably robust. So the question of how you are going to achieve sustainable growth should be answered: liberalization but with reflective and proactive policies.”
Akhtar’s appointment as SBP governor is the culmination of a long career at multilateral development agencies, which included drafting emergency bailout packages to resurrect the economies of South Korea and Indonesia during the region’s financial collapse in the late-1990s. These events made her acutely aware of the risks of overleveraging while focusing her interest on micro-sector reforms. The latter has gained expression in Akhtar’s exhortations to the banking sector to improve risk management still further, even after non-performing loans touched just 8% of all gross loans in 2007, from 24% a decade ago.
“I inherited a banking sector that was cleaner than it used to be. But given the currently high profitability of banks, they need to be woken up to harsh realities. This is not going to be a lifetime phenomenon, and you are going to see ups and downs. So I am advising them to invest, to invest and to invest more all the time,” Akhtar explains.
Hopefully, Akhtar’s pressure will enable the country’s banking sector to ride out the current political uncertainty. As she says, “The central bank is now stronger: we can withstand more jolts. And it will be difficult for any government to unwind the economic success story of Pakistan.
Her hawkish stance has won praise from market participants, such as Sakib Sherani, chief economist at ABN Amro in Islamabad. “Two years ago the central bank focused entirely on promoting the economy, but now governor Akhtar has been focusing on price stability and sustainable growth. I think she has been doing a very good job,” he tells Emerging Markets.
Perhaps Akhtar’s most dramatic effort to assert the independence of the central bank was the SBP’s edict in August 2007, which enforced ceilings on the government’s quarterly borrowings and required the retirement of 63 billion rupee of public debt owed to the central bank. She explains that this measure – aimed at sterilizing fiscal expansion – led to an uneasy confrontation with the government. “I have the mandate to do this, but previous governors did not have the courage. When the government received my letter notifying them of this, they said ‘how could you do this?’ but I explained that if I did not invoke the legislation, I would not be doing my job properly.”