Pakistan’s Exodus of Officials Exposes ‘Limbo’ in Policy

The resignation of two central bank governors and one finance minister in Pakistan since the start of 2010 has exposed a breakdown in policymaking, threatening efforts to revive growth amid surging prices and terrorism.

Shahid Kardar, who stepped down as Pakistan’s central bank governor on July 12, was the second person to quit the post in more than a year. He left two weeks before a July 30 monetary policy decision, when all 11 economists surveyed by Bloomberg News expect the State Bank of Pakistan to leave the discount rate at 14 percent.

Kardar said his differences with the government were impeding the central bank’s autonomy and ability to ensure “prudent” monetary decisions, and Moody’s Investors Service said his exit underscores the “discord” in policy leadership. The loss of key economic managers may undermine the credibility of Prime Minister Yousuf Raza Gilani’s government as it seeks aid resumption from the International Monetary Fund.

“The bottom line is that this government has not been able to tackle governance issues, and it doesn’t know where to go from here,” said Sakib Sherani, a former economic adviser to the Ministry of Finance, who left his post in December after an 18-month stint. “This limbo is sending wrong signals to the market and forcing technocrats to quit.”

Bonds, Rupee

Pakistan’s 10-year government bond yields have risen 1.03 percentage points in the past year to 14.01 percent, the highest level after Greece among debt markets tracked by Bloomberg. The currency, which weakened 1 percent in the period, was little changed at 86.50 against the dollar at 9:50 a.m. in Karachi.

Jaffer Qamar, the chief economist at the Planning Commission of Pakistan and the government’s Auditor General Tanvir Ali Agha also resigned this month. Shaukat Tarin quit as finance minister in February 2010, becoming the third person at the time to relinquish charge of the ministry in two years. Kardar had replaced Syed Salim Raza, who left in June 2010.

Gilani named Yaseen Anwar as the central bank’s acting governor. Anwar was a deputy governor since March 2007.

Kardar blamed increased government borrowing for price gains and kept the central bank’s policy rate, one of the highest in the world, unchanged since January this year after raising it in September and November by half a percentage point each to slow inflation. He cited “difference of opinion on policy actions” for his resignation.

Policy Independence

“The independence of a central bank is crucial, more so in challenging economic conditions,” said Saad Khan, a Karachi-based economist at Arif Habib Ltd., a brokerage firm. “The biggest challenge the new governor will face is to keep pushing for a limit on government borrowing and that may not be very pleasant for a lot of people.”

Government borrowing rose 58 percent to 716 billion rupees ($8.3 billion) in the last fiscal year from the previous 12 months, according to the central bank.

Consumer prices in Pakistan climbed 13.1 percent in June, the most after Vietnam, among the 17 nations in the Asia Pacific tracked by Bloomberg.

While Gilani’s government has pledged to narrow the budget deficit to a seven-year low of 4 percent of gross domestic product in the year ending June 30, 2012, it hasn’t yet enacted a law that would limit borrowings from the central bank.

Pakistan’s economy probably expanded 2.4 percent in the year ended June 30, slower than an earlier target of 4.5 percent.

Car Sales

Honda Atlas Cars Pakistan Ltd., the nation’s third-biggest carmaker, said this week sales fell 18 percent last quarter, a sign that consumer demand remains weak.

The IMF told Pakistani officials in May that the government needs to keep cutting the deficit to take pressure off monetary policy and allow more credit to companies. The Washington-based fund stopped disbursing money to Pakistan in May 2010 after the country failed to meet conditions attached to an $11.3 billion loan first issued in 2008.

Pakistan’s $162 billion economy is lagging behind emerging markets including India and China, which helped lead the global economic rebound from the deepest postwar recession. Pakistan’s expansion has also been undermined by a Taliban insurgency and record floods in 2010.

The floods destroyed $3.3 billion of crops, according to government estimates. The nation’s military has stepped up its fight against insurgents in the northwest after al-Qaeda leader Osama bin Laden was killed by U.S. troops in Abbottabad on May 2. At least 35,000 Pakistanis have been killed in terrorist attacks in the last decade, according to the government.

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