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ArchiveJanuary 2 2002

Central Banker of the Year

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GLOBAL: Mugur Isarescu, Governor, Central Bank of Romania

Mugur Isarescu is one of the great pioneers of eastern Europe's capitalist economies. The governor of the Central Bank of Romania came into office in 1990, when the country was still recovering from the depredations wrought on it by Ceacescu. Indeed, one of his first acts was to launch an investigation into closet selling of the national gold reserve by the former dictator.From there, he went on to lay down the structure for the removal of the state bank's monopoly on banking. This proved the basis for the creation of a private banking system and an independent central bank, which Mr Isarescu has run for the past 10 years. For one of those years, 2000, Mr Isarescu ran not just the Central Bank, but also the country. His financial competence and fairness were held in such high esteem that the Romanian president asked him to take over the reins of government, at a time when its ruling coalition was in disarray. The sensitive task of holding negotiations with the EU about accession fell to Isarescu during this period. But he was not unhappy to return to the Central Bank as governor when his manifesto failed to win a majority in last year's elections.

The Central Bank is where Mr Isarescu feels happiest and, in his own words, "more relaxed" than in the ferocious political arena. He had a distinguished academic career before joining the Central Bank, and sees himself as a technocrat and technician rather than an aggressive self-promoter. His opinion on economic matters is routinely sought by the minister of finance and the president, and it is widely accepted that his influence on Romania's financial affairs is responsible for the relatively benevolent economic state of a country that started out only 10 years ago in such turmoil.

When Mr Isarescu joined the government, the country had no reserves, other than gold, and its economy was completely unmanageable. Since then, the reserves have built up to today's level of $3.5bn, which covers between three and six months of imports and services. This represents a rise of $1.2bn in the past year, and ensures Romania an optimum level of protection.

This performance has been made possible by an impressive growth performance. Romania is rebounding from some three years of recession, spanning 1997 to 1999. So while Western economies were surging, Romania was struggling in a manner Mr Isarescu calls "typically contra-cyclical". Last year, exports surged 22% producing GDP growth of 1.5% and this year, they grew 15%, producing 5% GDP growth.

In these benevolent conditions, and with the assistance of growing foreign direct investment, $1bn worth of remittances by Romanians abroad and EU support, gross capital formation has strengthened considerably, rising from 5% in 2000 to 10% in 2001, and the number is expected to grow.

The weak card in the Romanian economic pack is the country's inflationary position. Management here can notch up only a qualified achievement in recent years. Inflation had been raging at around the 50% mark during the recessionary mid-to-late-1990s. But, during 2000, the inflationary figure fell from 55% to 40%, and in 2001, it dropped further, down to 30%. Mr Isarescu says the figure would have dropped yet further without the country's worst drought for 50 years and high oil prices. Nevertheless, he promises Romania is on course for 22% inflation next year, 14% the year after, and single-digit inflation in 2004. He readily admits Romania is a "laggard among the post-communist countries", but says the situation is under control.

Structural deregulation, as well as economic performance, have been key concerns of the central bank governor over his 10-year tenure. The need for widespread privatisation of the banking system, as much as the rest of the economy, was established in 1991, but it has only recently come to fruition. The sale of the state-owned Banca Agricola to Raiffeisen in 2001 is regarded by Mr Isarescu as a particular landmark, and portends further sales in the banking sector. Little more than half of the country's banks have any private capital involvement, although this is a dramatic change from 10 years ago, when the system was entirely state-controlled.

Mr Isarescu is one of the world's longest-serving central bank governors - only two other central bank governors, of which one is Alan Greenspan, have outlasted him. But in 2004, Mr Isarescu will step down. His future intentions have yet to be revealed, but when he leaves the Central Bank he will be only 55, so there seems little doubt a role will be found to enable Romania to continue to benefit from his breadth of experience and wisdom.

ASIA: Rafael Buenaventura, Governor, Philippines Central Bank

Raphael Buenaventura joined the Central Bank of the Philippines after a long career at Citibank. This experience in one of the world's more aggressive private banks honed his political and persuasive skills so that when he had to fight battles with government departments over the size of their budgets, he usually won. The result is an economy increasingly driven by tight monetary and anti-inflationary principles.

The battle to have his policies accepted was demanding, he says. "People have been used to a fixed, targeted range of exchange, so we have had to work hard to get people to accept a market-determined exchange rate. We have to provide results - when we said it would be market determined but not less volatile. We had to ensure we did not have a volatile environment despite all the difficulties."

The vehicle for promulgating this new, and sometimes controversial, approach to economic management, says Mr Buenaventura, is the Central Bank. The bank's key job is to keep prices stable, and "we insisted that the other branches of government understood that this took precedent over everything. The central government had to understand that a disciplined budget expenditure programme was important. A high degree of understanding made it possible for me to be accommodative in our monetary policy. Without that, it would have been extremely stressful."

Two statistics testify to the competence of the economic management of the Philippines. The first is relatively low inflation, which, at 6.1% at end-2001, stands at the lower end of the 6% to 7% range set by Mr Buenaventura at the beginning of the year. The governor attributes this to low agricultural prices as well as his tight monetary policy.

The second achievement is GDP growth of between 3.1% and 3.3%, which Mr Buenaventura says is highly creditable given the global economic downturn over the year. It also compares well with other economies in the Asian region, many of which have been hit by Japan's recession. Declining exports, which fell over 2001 by 15% for the first time for a number of years, also held back the economy's expansion.

To stimulate domestic demand and growth, the Central Bank has been steadily lowering overnight interest rates for much of the year. The bank's policy is to maintain growth to pay back debts rather than print more money.

SOUTH AMERICA: Carlos Massad, Governor, Central Bank of Chile

Carlos Massad, the governor of the Central Bank of Chile, learnt much of his economics at the feet of Milton Friedman and the other leading monetarist economists at the University of Chicago in the 1960s. His belief in the importance of the free running of the markets was established there and, as governor of the Chilean Central Bank since 1996, he has had an opportunity to put the theory into practice. He says the overriding goal of the policy of deregulation, which he has pioneered, was "to leave more space for the markets to work".

Mr Massad has pushed through one of the great reforming programmes in Latin America. His pursuit of an independent monetary policy and a free market approach has led to Chile being considered "one of the most sustainable economies in South America".

He cites as his greatest achievement, "the elimination of all exchange restrictions in Chile". In doing so, he was reversing 60 years of controls. "It has taken a lot of effort to reach this point. We have been developing a gradual programme of eliminating restrictions and controls. From September 1999, we have had a floating exchange rate. Years of preparation were required to avoid the consequences of currency mismatches." All remaining foreign exchange restrictions were removed from Chile on April 2001.

The system of deregulation was put through its toughest test in the wake of the September outrages, but Mr Massad says the system showed it had the elasticity to absorb the shock and come out largely unaffected. "The present policy set-up, of inflation targeting with floating exchange rates, has worked very well, particularly during the stressful days of September, October and November," he says. "It allowed us to ride the impact of the terrorist attack on the US without endangering our inflation target of between 2% and 4% which we will fulfil over this year and next. By the end of this year, we will have an inflation of close to 3%."

Turmoil in the markets caused a sharp depreciation of the Chilean peso between September and November, but Mr Massad says the peso has recovered "very nicely" and there have been no ill-effects on inflation levels.

The economy showed a similar resilience to the damaging effects of the Argentinian near-default. "We were afraid that the spill-over from the Argentinian problems would cause some damage to the Chilean economy, but the markets protected Chile."

He cites Chile's sovereign premium of 160 basis points, which compares favourably with Mexico's premium of around 300 basis points. "This has only changed very slightly during this period, and we allowed the exchange rate to take the burden of the adjustment while we kept interest rates unchanged. We understood these effects on the exchange rate were only transitory and we were proved right."

AFRICA: Linah Mohohlo, Governor, Central Bank of Botswana

Against a background of Africa's intractable economic problems, one country has shown that advances can be made and uncontrollable inflation brought under control. The small country of Botswana has used restrictive monetary policy to rein in inflation at 6.8% at a time when it might have threatened to go into double figures and beyond. Curbs in government spending, which has been brought down from 15% to 8%, and interest rates, which have been retained at 14.25%, have been the principle tools for achieving this sound outcome.

The reward for this policy, which appears so far to have won political support, has been some particularly favourable ratings from Standard & Poor's, which gives Botswana an A rating, and Moody's, which gives it an A2. These are the highest ratings of any country on the African continent and a tribute to the work of the country's Central Bank governor, Linah Mohohlo.

Mrs Mohohlo says the country invited the agencies in not to borrow, but to win acknowledgement for Botswana's high quality of economic management and perseverance. "We didn't obtain a credit rating to borrow; it was for the purpose of getting outsiders to see the achievement made, and to highlight the issues we needed to pay attention to, and to give us a pat on the back for the way we were running the country as a whole, in the areas where we seemed to be doing okay.

"In the African context, people make headlines and get to be known for doing something bad. If something is achieved on the good side, people don't hear about it. We need foreign investment to expand the economic base, but that requires us to publicise the country so that it is known for its economic achievements. We want to be known as the best investment destination on the African continent."

While many of the macroeconomic indicators have fallen neatly in line with Mrs Mohohlo's goals, one stays awkwardly off-target. The country had hoped for economic growth in 2001 between 5% and 7%. But the US economic recession, coupled with the impact of the attacks of September 11, have shot that goal to pieces and Botswana now expects nothing more than "close to the bottom end of the forecast".

But Mrs Mohohlo remains strongly optimistic for an improving performance in inflation and growth for 2002. Her abiding motto: "If you do not dream, you are dead."

Finance Minister of the Year

Kemel Dervis, Turkey

Kemel Dervis, Turkey's economy minister, walked into the country's full-blown economic crisis last February with his eyes open. It represented an unprecedented challenge for the man, as well as his country, but he remains in post, and in some quarters has even been called the saviour of Turkey. His qualifications for the job were not hands-on economic management - he had none until last year - but rather ample knowledge of seeing other countries and finance ministers deal with crises. A 22-year long career at the IMF has given him exposure to eastern Europe's transition following the collapse of communism, and from his IMF vantage point, he also saw Mexico's 1994 crisis. He says this bears many similarities to Turkey's, seven years later. "My job at the bank meant that I had worked as an adviser in settings that were not totally different in other parts of the world.

I had to learn the details of my own country's economic situation, but I have worked with similar situations. It was particularly exciting to be able to do something for my own country."

He diagnosed Turkey's February 2001 crisis in the following terms: "It came after the attempt to use the exchange rate as a nominal anchor to fight inflation, and a period of real appreciation of the exchange rate, and a widening current account deficit. It occurred against the background of weaknesses in private and public banks.

"The exchange rate finally collapsed in late-February, leading to a disorganisation of balance sheets in both the banking and corporate sectors, very high interest rates and, of course, big losses in the banking system, with the banks having open positions in foreign exchange."

As soon as he was appointed in March 2001, Mr Dervis adopted an aggressive strategy to tackle the crisis, of which the three main dimensions were a strong fiscal policy, a floating exchange rate that left Turkey in a very competitive position after devaluation, and many structural reforms.

Says Mr Dervis: "We tried to turn the crisis into an opportunity by passing 17 structural reform laws between April and June, all with the objective of creating a more competitive economy." Among the new institutions established to put Turkey back on the rails were an independent regulatory authority, a European-style independent bank and an independent bank supervisor seeking to "cut the link between short-term politics and the banking system". Agricultural subsidy and energy policies were also reformed.

An independent board of managers was created to control three of Turkey's four main state banks whose debts were to $20bn at the end of 2000. This attempt to depoliticise banks, corrupted by political considerations, was noticeably successful. Mr Dervis says: "We removed the banking system from short-term politics and put in professional management. We asked them to operate under tough private sector rules. Supervision for the rest of the banking system has been strengthened. The banking system has been turned round dramatically, and it is now being operated in a very professional way."

The huge debt mountain has, in the meantime been transferred to the state budget, adding to the debt burden, yet Mr Dervis says he has reduced the budget deficit this year by cutting public spending and raising taxes. The measures were not universally popular. While the prime minister and the president supported him, the programme was understandably unpopular with ministers whose budgets were being hit. "It was not always popular to renovate tough fiscal policy. There was some opposition in Parliament and among those whose budgets were being cut. But public opinion was broadly supportive of the programme. I have learned over the years that you cannot succeed in economic policy unless you have a reasonably supportive public opinion. One has to explain why things are needed and what the benefits will be. In a democratic society, one cannot succeed against public opinion."

One body of opinion wholeheartedly in favour of the reforms was the IMF, which gave the country a $10bn loan in 2001 and has agreed in principle to a tranche of a similar size for the beginning of this year. Mr Dervis adds: "We hope the IMF will continue to support us. IMF support was critical for overcoming the crisis this year [2001]. We have just competed technical negotiations for a new programme for 2002. That will give us another boost, because the IMF framework remains an important part of international confidence and it projects confidence among investors."

Mr Dervis observes: "We had a very tough time for six months and this was made more difficult by September 11, which had a negative shock on financial markets and hit foreign direct investment (FDI) and tourism. But, since last November, we have finally seen the rewards." He cites increasing capacity use, the stabilisation of the exchange rate and falling interest rates. "So, after a very difficult six months, we are now entering the New Year with much more optimism." Mr Dervis believes his medicine will start to take effect. He expects growth to resume later this year and reach between 3% and 4%. Turkey's inflation remains "chronically high" but, after a "very bad year" in 2001, when inflation topped 70%, he says the figure for the year will show inflation back to 35%. The hard man's medicine may yet cure the troubled country's endemic ills.

ASIA: Shaukhat Aziz, Pakistan

Finance ministers face fewer and harder challenges than keeping an economy on a tight rein when a neighbour is unexpectedly engaged in a major war. Doubts about the country's ability to produce and ship goods, coupled with concerns over its internal stability, could easily undermine policy, and quickly damage economic fundamentals.

Yet Pakistan's economy has shown great resilience to the effects of the war in Afghanistan. The credit for this positive outcome from such a potentially damaging series of events must go in part to Shaukhat Aziz, the country's highly confident minister of finance.

Says Mr Aziz: "When we entered September 11, we were in a stronger position than ever before because of the fiscal discipline we had imposed, because of building reserves, and because of containing the deficit. Since September 11, the reserves have risen by $1bn and today Pakistan has $4.4bn in gross reserves, the highest ever in our history. The rupee and the stock exchange have strengthened over the period by 10%.

"Although we were near the area of tension, there has been no liquidity run on banks and prices have stayed firm, so the shock absorbers worked. If you stay the course of reform, it prepares you for crises."

While Pakistan's economic management was already winning it credibility before September 11, afterwards, it appeared to be repaid in spades. The IMF agreed to a $1.3bn loan over three years while the US gave $1bn in economic assistance to Pakistan, as well as debt relief. Pakistan has also received a UNDP loan and money from Japan, Pakistan's largest bilateral donor.

Macro-economic indicators in Pakistan were undoubtedly rising before the September 11 outrage, says Mr Aziz, and US support to the country was merely a recognition of its economic performance, rather than a reward for its loyalty to the US coalition. He points to a falling fiscal deficit which came down by 1% of GDP in the course of 2001, "the highest reduction in our history". Another achievement of the government has been a reduction in the current account deficit to below 2% of GDP, half the figure occurring in the 1990s. Mr Aziz notes: "We really put in fiscal and financial disciplines, we controlled what we spent and we spent judiciously. It was totally transparent."

Another target of the administration has been putting a brake on inflation, which stayed at 4%. Government expenditure was concentrated away from the defence area and directed towards areas of social concern, such as health, education and poverty reduction.

Mr Aziz has taken full advantage of the military government's non-elected and non-political status to introduce and enforce a tougher fiscal regime. This has started to resolve a perennial problem of non-payments of taxes, and in each of the last two years, 13% more taxes have been collected.

One area of disappointment in Pakistan's recent record is its rate of growth. Performance of 2.7% GDP growth fell far short of the 4% target. The failure to match expectations is explained by fall in output from agriculture, which was hit by a severe drought, and decline in exports and FDI, damaged by loss of confidence following September 11.

SOUTH AMERICA: Pedro Malan, Brazil

Brazil might easily have been swept away in the crisis now sweeping Argentina and threatening to infect other Latin American countries. But, so far at least, it appears to be surviving in good shape. Responsibility for this must go in large part to its finance minister Pedro Malan. In the course of his seven-year period at the helm, Mr Malan has negotiated the country round many problems, but now he says it is on course to sustainable growth, with inflation coming under control and a more productive real economy.

"Keeping inflation under control is a policy which makes sense, not only from an economic and financial point of view, but also from a political point of view. In addition to controlling inflation, we have to have growth, but growth which is sustained over time," he says.

The original inflation target for 2001 of between 4% to 6% was missed due to high oil prices, but the likely outcome of 7% was regarded as impressive given the difficult economic conditions.

Growth was disappointing, but far from catastrophic. The targeted growth rate of 5% will be missed by a wide mark, and an annual outcome of 2.5% is now predicted. But the country has taken the full brunt of the US economic decline, and, depending on the state of the US economy, is expecting a better outcome for 2002.

Given the difficulties, the performance of the Brazilian real has been creditable. In the wake of the September 11 crisis, it rose to 2.83 to the dollar. But as conditions stabilised it went back to a pre-crisis level of 2.3 to the dollar. Mr Malan says this indicates the market's acceptance of the country's flexible exchange rate system. Sound and growing exports and a strong performance in foreign direct investment have contributed to a creditable $1.8bn trade surplus, with the hope that this could grow to $5bn in 2002.

Brazil has won the approval of the IMF for its tight approach to fiscal management and control and this has been demonstrated by a $15.6bn loan made to the country in 2000. The country has only drawn on $4bn of this so far. Economic competence has likewise impressed the economic markets, and Brazil has announced it may tap the international capital markets to the tune of $5bn in 2002. This will add to the $1.6bn raised from offerings in the Japanese markets in 2001. Mr Malan says the welcome given to Brazil is indicative of market approval of the country's sound economic management. He hopes that will also be rewarded in 2002 with lower inflation and higher growth. But as always, Uncle Sam will determine the exact outcome.

AFRICA: Yaw Osafo-Maafo, Ghana

At the beginning of this year, Ghana's finance minister, Yaw Osafo-Maafo, set himself the objective of keeping expenditure under control, reducing the rate of inflation, stabilising the value of the cedi, increasing revenues, improving the fiscal outturn and containing net domestic borrowing. It was a tough programme for a country whose economy faced severe structural and external problems. But the extent of progress made over the year has impressed many observers, and will serve Ghana well as it seeks to modernise its infrastructure.

On the expenditure front, the government has sought to control expenditure by imposing a rigorous system of quarterly expenditure ceilings to control new commitments. A cross-departmental committee will also monitor scarce donor and government resources.

Performance on inflation has been impressive. Monthly combined inflation showed a rate of 4.1% in March 2001 but this tumbled to 0.5% in September 2001. Inflation over 12 months was as high as 40% in January this year, but by September it had dropped to 28%.

Overall fiscal outturn showed a 0.9% deficit, against a target of 2.5% - a result that took many observers by surprise. Efforts made to contain government borrowing also paid off over the year. This reached no more than 602bn cedis, against a target of 1341bn cedis and was a major contributor to halting an upward pressure on interest rates.

One major achievement of Mr Osafo-Maafo's term of office has been to reduce the payment on external debt. This amounted to 1088bn cedi, of which 819bn cedis was due on principal repayments. The target for the half year for principal and interest payments was 1194bn cedi and 421bn cedis, respectively. But the recent budget showed the actual expenditures were much lower due to savings arising from the country's decision to participate in the IMF's highly indebted poor country initiative.

To reduce the stock of domestic debt, the government of Ghana launched an index-linked bond on September 7, 2001, and this trades successfully. Launches of further medium and long-term financial instruments are planned to deepen further the country's financial system.

Finally, the government deserves considerable credit for the stability of the cedi, a marked change from the volatility experienced last year, and a clear indication of the market's confidence in Mr Osafo-Maafo's management.

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