Shamsad Akhtar, governor of the State Bank of Pakistan, has an ambitious vision for the bank to have a greater say in economic policy, she tells Karina Robinson.

“She kicks ass!” says an aide of Shamsad Akhtar, governor of the State Bank of Pakistan. The petite head of the central bank certainly needs to.

Attacked for raising interest rates to stem inflation, for drawing down reserves, for speaking out against the government’s spending plans and for forcing banks to raise provisions, Ms Akhtar admits that she is always very unpopular. She feels the need to say that she does not “get thrills” from raising interest rates, which is “the most unpleasant part of my job” – implying that that peculiar accusation has been levelled against her.

Inflation busting

In fact, 53-year-old Ms Akhtar, who has spent most of her working life at the Asian Development Bank (ADB) and the World Bank, gets a buzz from the Holy Grail of most central banks, namely inflation busting. “My happiest moment was when core inflation came down to 5.2% in May 2007. And I said, it’s working!” she says, snapping her fingers with gusto. However, as she admits, inflationary pressures then took a turn for the worse on the back of the worldwide hike in food and oil prices and domestic government borrowing. Consumer price index inflation in Pakistan is forecast to hit 8% by mid-year, according to Standard & Poor’s.

The big question is whether Ms Akhtar will be reappointed when her three-year term finishes at the end of the year. Although she will not commit to wanting the job – insisting that she wants complete flexibility to manage the trade-offs between price stability and growth while seeing how the political situation evolves – she shows her hand by saying that in the two years and five months she has been in office she has been “trying to take the bank to new frontiers”. New frontiers cannot be achieved in either the length of time she has been in office or in her remaining seven months. But an extra three years could add on the kilometres.

That is not to belittle her achievements. “The central bank in Pakistan has incrementally gained, I would not call it full-fledged independence, but a say in matters,” she notes, a view shared by private sector bankers. In mid-2007, she called on the government to cut its borrowing from the central bank – a bold and unprecedented move in Pakistan.

She failed to make that happen, an understandable outcome due to the political upheaval in the second half of 2007 that included a disputed presidential election won by General Pervez Musharraf, the dismissal of Supreme Court chief justice Iftikhar Chaudhry, emergency rule and the assassination of iconic opposition leader Benazir Bhutto.

Budget deficit

Now, with a new government in place following parliamentary elections in February, total central government borrowings from the state bank stand at a record Rs380bn ($5.7bn). Although finance minister Ishaq Dar has said that the government would cut public expenditure by $4.5bn in its first months in office and raise about $3bn from international lenders and investors, the first part of the plan looks unlikely, while the credit crunch makes the second part expensive. As Pakistan grapples with the need to upgrade its creaky power and transport infrastructure, manage the consequences of food inflation running at about 16% and deal with the terrorist problem, the budget deficit for fiscal 2008 is forecast at 8% of gross domestic product (GDP), compared with the ­budgeted 4%.

Meanwhile, the unstable coalition between the Pakistan People’s Party (PPP), led by Ms Bhutto’s widower Asif Zardari, and Nawaz Sharif’s Pakistan Muslim League (PML-N) was in trouble as The Banker went to press. The PML-N said it was pulling out of the coalition but would support government policies. Whatever the political turn of events, populist policies appear likely.

Fiscal discipline

As a result, the State Bank of Pakistan is probably the only institution that is capable of speaking up authoritatively for fiscal discipline. Ms Akhtar is holding her fire so far, saying that the government has just taken over and needs to absorb the realities of the situation.

But she is wary of how the increased food prices, which hit the poor hardest, are dealt with. “Of course, governments have to subsidise. But do they in a blanket way? It should be done in a targeted way so there are no leakages,” she says, mentioning the federal state’s lack of a well-developed delivery system for food and oil.

At this point, as if on cue from a movie director, the electricity cuts off. But the generator in the house of Ms Akhtar’s parents, with whom she lives, located in Phase 5 of the Defense Housing Society – an upmarket area of Karachi developed by the pervasive military – kicks in almost immediately.

Crisis experience

Tea is served in a delicate cup marked at its base as coming from the “Social Security Office of Thailand”, a memento from her days at the ADB. Seven years into her career at the development bank, the Asian crisis exploded. “I was present at the centre of Asia when the Asian financial crisis [struck]. One of the most important lessons is that provisions [matter],” she says, in reference to her decision to force local banks to double their provisions for non-performing loans last year.

The chief executive of a top Pakistani bank told The Banker that the banks had not objected to this measure, but had asked for a two-year extension, instead of having to apply it immediately.

The governor explodes. “They objected like hell!” she exclaims. “They went to the ministry of finance to complain about ‘this stupid governor’.”

Good impression

In general, however, commercial bankers praise Ms Akhtar governorship. Badar Kazmi, chief executive of Standard Chartered in Pakistan, says that when she came to power, bankers were very nervous about how she would carry on the reform of banking system supervision, but they have been favourably impressed by her partnership approach (see A complex predicament). Some bankers, though, say she needs better deputy governors to manage the political process and avoid getting bogged down by the bureaucracy.

Ms Akhtar believes that commercial bankers will realise the prescience of increased provisions as Pakistan’s economy slows. Analysts are forecasting GDP growth of 6.2% this year, compared with an average of 7.6% in the past four years under a ­relatively stable military government that opened up and privatised the economy. Rating agency Standard & Poor’s believes that sustaining growth is contingent upon the new administration carrying reforms forward and maintaining Pakistan’s attractiveness for foreign investment.

The record pace of growth in FDI inflows in the past few years has slowed in 2008, with its consequent effect on the current account deficit, which is projected to reach 7% of GDP for fiscal 2008.

Policy continuity

However, Ms Akhtar is confident that the “wait and see” attitude of domestic as well as foreign investors will evolve into continued investment once they realise there is continuity in Pakistan’s economic policy.

“It is just a question of time,” says Ms Akhtar, the recipient of The Banker’s 2007 award for Central Bank Governor of the Year in Asia.

Her position in 2008, though, needs bolstering and her snap decision to have me interview her on Pakistan television later that day was part of that, although generally she does not court publicity: “I’m not a film star. I don’t wine and dine.”

The 40-minute interview, broadcast all the way to far off villages in the world’s fifth largest emerging market by population size, might not have rivalled the attention paid to the travails of controversial star bowler Shoaib Akhtar in this cricket-mad nation, but it served a ­purpose.

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 Karina Robinson

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