December 2006

The Iron Lady at the Heart of Pakistan's New Economy

IT WAS France’s wartime resistance leader and later President Charles de Gaulle who lamented how difficult effective governance was in a nation where there are 246 varieties of cheese.

Pakistan’s new central banker Dr Shamshad Akhtar would sympathise with the French general as she makes her way to her office in the State Bank of Pakistan building on Karachi’s chaotic I.I Chundrigar Rd, Pakistan’s Wall Street that the British Raj traders used to know as Macleod Rd.

In just one kilometre of the mercantile mayhem that the 53 year-old Dr Akhtar has presided over in the year since her appointment, there suddenly seems as many banks in Pakistan as France has fromage - Al Baraka Islamic Bank, Union Bank, Soneri Bank, Wall Street Exchange, Habib Bank, Indus Bank, Atlas Bank, National Industrial Bank, Kazbank, Muslim Commercial Bank, Oman International Bank, Bank of Punjab, Bank Alfalah – and the myriad others that have opened their doors in Pakistan’s ongoing liberalisation of its financial sector.

Dr Akhtar, an unmarried technocrat-economist who came to an initial three year term as SBP governor after a long career with the Asian Development Bank and World Bank, well recognises chaos. She was a senior technocrat the ADB when Asia’s economies collapsed in the 1990’s, and literally organised some of the massive bailout packages to salve and correct them. What’s happening on Chundrigar Rd outside her office is frenetic but nothing much to worry about yet. “The world is wiser, stronger, the global financial architecture is more secure,” she says. “What we are seeing in Pakistan is the by-product of first generation financial sector reform,” she says. “In the main, I’m a committed free marketer.”

Midst the beards and bedlam along here, one doesn’t see too many women on Chundrigar Rd either, save the occasional office lady. Pakistan remains very much a male-dominated – many would argue misogynist – society. One of its more successful banks is called First Women Bank, run by women and lending almost exclusively to women. That such a bank even exists is an eloquent statement of its need in a country like Pakistan.

It follows that Dr Akhtar in being the 14th governor of the State Bank of Pakistan – and its first ever woman – is quite an achievement for her country. Pakistan’s premier financial newspaper Business Recorder wrote after her appointment last year that “having a woman economist cum banker to head Pakistan's Central Bank certainly fits the image of the country that the President is keen to build.” Indeed, the October edition of the SBP’s own inhouse journal is another such eloquent statement. Page three displays a scene not often observed in Pakistan; Dr Akhtar presides at the head of a boardroom table during a September meeting of the SBP board called in provincial Faisalabad. There are six other directors; all men in suits, all seated in deference to her authority.

While the scene brings to mind that famous remark about Margaret Thatcher being the ‘best man in the cabinet,’ her penetration of the glass ceiling is not something that Dr Akhtar says she gives much thought to. Indeed, she shuns such labels as “homegrown female executive” much preferring to promote meritocracy as the gender-blind vehicle of advancement.

“The first woman? It’s a great excitement for women in Pakistan, “ she says, almost perfunctorily. “Of course, I think it is a great honour to be selected for such a position.”

“But I’m primarily and overwhelmingly concerned with doing my job well and effectively,” she says. “If people want to focus on my gender, then let them but I don’t see at all how it impacts on the type of job I do.”

Fair enough, and enough said on the topic. That she is the first woman to be appointed is clearly something to celebrate. But more relevant in a country that though booming remains one of the world’s poorest and most politically fraught countries is that contrary to the corrupted tradition of Pakistani bureaucrats, Dr Shamshad Akhtar breaks the established mould. She is a cleanskin, a trait rare in a rancid civil service even its president and prime minister admits is riddled with corruption. She claims to be not particularly interested in politics – also rare in Pakistani bureaucrats – and doesn’t hail from the elite 20-odd “grand families” that have dominated Pakistan’s public life since its independence in 1947. Nor can she claim a cronified background in the military, that other great elephant dominating the national debate. “I had met President Musharraf only briefly before I was appointed” she says. “I didn’t know him at all.”

Dr Akhtar may be sanguine about Pakistan’s banking boom but there are also practical downsides to Chundrigar Rd becoming South Asia’s newest Eldorado. Pakistan’s authoritative Daily Jang newspaper also has its office here, and it worries about the decline in the neighbourhood. “Crime here has reached unparalleled heights,” a recent Jang article said. “Mugging, mobile phone theft, car snatching and other crimes have become routine. In daytime, people are accosted, especially when they leave ATMs. After dark, people are afraid to walk to their cars and many companies now have guards to escort employees to their transport. It is common to hear of people being stopped by gun-toting men and asked to hand over their wallets and mobile phones.”

Midst Chundrigar’s hubbub, there doesn’t seem to be much respite in Islam, Pakistan’s official faith. The muezzin rings out almost in vain across the commerce from a little-patronised mosque to the rampant stock exchange beyond, where the index has risen nine-fold since September 11, 2001, in tandem with Pakistan’s roaring property market and the booming banking sector.

The date is no coincidence. Before 9/11, Pakistan was a pariah, its economy close to collapse. After seizing power from the democratically-elected Nawaz Sharif government in a 1999 coup d’etat, President Pervez Musharraf was condemned as a military dictator who had destroyed democracy, a strongman whose name George W Bush infamously didn’t much recognise as he was seeking office in the U.S. True, the grasping Nawaz regime had done more than its fair share to corrupt Pakistani’s fragile democracy but the world’s policemen, notably Washington, argued that governments should change via the ballot box, and those who take power militarily certainly shouldn’t be trusted with nuclear weapons, Pakistan having successfully tested a device in 1998.

Then came the Al-Qaeda attacks on the U.S in 2001, masterminded next door to Pakistan by its neighbour and client, Taleban-controlled Afghanistan. Suddenly, Musharraf went from pariah to pal as Pakistan became a frontline state in the War on Terror. Now Musharraf is feted in western salons as its new best friend. A recent US book tour to promote his memoirs, In The Line Of Fire, afforded him the air of a rockstar, as he joshed with primetime talkshow hosts. Musharraf promised to deliver prosperity to Pakistanis on coming to power, and the terror-panicked West and, it could be argued, Osama bin Laden, has helped him.

Since the 2001 attacks, the State Bank of Pakistan has banked what might be described as Islamabad’s 9-11 dividend. No longer a diplomatic recluse, Pakistan has enjoyed major concessions to keep its 170 million people inside the anti-terror tent and away from the grip of Islamist extremists. An India-pressured embargo to upgrade Pakistan’s air force with a squadron of US-built F-16 fighters has been lifted, and billions in crippling foreign debt rescheduled or simply cancelled.

These post- 9/11 economic breaks have seen Pakistan’s economy boom, after it was close to collapse in 2000-2001. Foreign reserves of just $900m then have ballooned to $16 billion and are fast rising, servicing a lower foreign debt burden. Musharraf and his ex-Citibank heavyhitter Prime Minister Shaukat Aziz have embarked on a popular if controversial privatisation program, with the oft-heard mantra that the state has “no business being in business,” a credo the SBP’s Dr Akhtar says she ‘wholeheartedly concurs with, absolutely.” Pakistan posted economic growth in 2005 of 8.4% was second only to China in Asia. In the year before 9/11, it was just 1.5%. Pakistan has been a huge winner from Osama’s sudden appearance in the international neurosis. And if anything symbolises this boom, its Chundrigar Rd in all its frenzied glory. And if anything symbolises Pakistan’s infinite contradictions, its that a modern, self-made woman presides over it.

DR SHAMSHAD Akhtar is the daughter of a former Secretary of Pakistan’s Economic Affairs ministry, Dr M.A.G.M Akhtar, who she describes as a solid civil servant. Moreover she hails from a town in the desert interior of Sindh province that surrounds Karachi, Pakistan’s commercial capital, and a departure from the “Punjabi empire” many Pakistanis lament their country is. “I come from a very simple middle-class background,” she says. “So from Pakistan’s perspective, having a woman from rural Sindh is a major achievement, I guess.” I remind her that the last women from rural Sindh to achieve national prominence was the notorious two-time PM Benazir Bhutto who, unlike Dr Akhtar, hailed from a wealthy family. She laughs; “I guess they were taking some chances with me.”

Still, with her background in multi-lateral international agencies like the World Bank and ADB, where she doesn’t break the mould is that Dr Akhtar’s appointment continues a theme among Pakistani central bankers, and one particularly relevant to a country whose economic fortunes are so closely determined by international events. Her two most recent predecessors as SBP governor, Dr Muhammad Yaqub (1993-1999) and Ishrat Husain (1999-2005) had careers with the International Monetary Fund and World Bank respectively. Now came Akhtar from the ADB, a narrower focus but still a multi-lateral one. The Business Recorder asked on her appointment last year at the retiring Governor Husain’s recommendation “is her appointment a diktat from the multilateral loan giving agencies to a recipient country?”

The Harvard graduate and Fullbright scholar says no, Dr Akhtar joined the World Bank in 1980 at its office in Islamabad as its country economist, this a year after the Soviet invasion of Afghanistan and the resultant transformation of Pakistan’s economy when, then as now, Western aid and materiel poured in, particularly to its fractious North West Frontier region. “All my critical learning as an economist was on Pakistan,” she says. She was at the World Bank for 10 years, before moving to the ADB headquarters in Manila, where by 2004 she had risen to be Director-General of its Southeast Asia Department, which made her one of the institution’s most senior technocrats. While at the ADB, a telling time in her brief was the late 1990’s financial crisis, the “Asian Contagion” that swept the region. She helped, hands-on and with real authority, to structure and implement the emergency resuscitation of two of the region’s most wounded financial sectors, a $4 billion line to revive South Korea and a $1.5 billion tranche for Indonesia.

Her appointment has been well-received by the market. “I think everyone likes her, across the board” says JP Morgan’s country head Reza Rahim, who lead Pakistan’s biggest ever privatisation last year, the $3 billion sale of management control in state-owned telco PTCL to Etisalat of the United Arab Emirates. “It doesn’t matter that she’s a woman, she has the respect. She is quite a dynamic person, in her understated way. She very much understands the fundamentals and she’s been doing a very good, steady job so far.”

“She has come from the ADB, with a more micro view,” Rahim says. “She has seen banks go down. She’s had the practical experience from around the region at tough times, there’s nothing like that, better practical than being a theorist.”

Dr Akhtar says she wasn’t anticipating being appointed governor. She had been discreetly asked by a Musharraf early last year to present a CV and was invited to a brief meeting with him at his Army House office in the garrison town of Rawalpindi whilst on family home leave. Many months past – “I wasn’t exactly waiting by the phone” – and she had even heard on the grapevine that someone else had been appointed. Meanwhile in Pakistan she was discussed in the press as the hot candidate for the post. “I heard a week earlier that it was not me,” she says. “I wasn’t too fussed about it, I was leading a busy, stable life, I even called up my family and told them I wasn’t moving back to Pakistan. So they planned to come and visit me instead,” she laughs.

“Then I got a call in my office at the ADB in Manila, it was late evening and I’d had a long and busy day. Then I told my family that we have a different scenario. They said that they had already bought the tickets (to visit her in Manila), and ‘we are coming.”

After a career in ‘democratic’ agencies, Dr Akhtar admits she “clearly” had some reservations about the consequences of joining Musharraf’s military-led government. “Yes, I thought all that through but I felt that I had been so long with multi-development bank work that it was a good opportunity for me to take a break and deal with the real world, ie, implement what I had advised.”

As for personal qualms about Musharraf as a military leader, Dr Akhtar seems a convert, or at least a pragmatist. “He is a very good leader, he struck me as a professional and tolerant person, a person with whom you can communicate. Some of the achievements of his regime are pretty remarkable.”

“There are always pros and cons with military regimes but what is important is the leadership quality of the person himself.”

Dr Akhtar presents as a modern, realistic and well-studied administrator. Unsurprisingly, she admires the legacy of the astute’ Alan Greenspan and is an ardent admirer of the US Nobel economics laureate and former World Bank Chief Economist Joseph Stiglitz, perhaps best known for his criticisms of the role of the IMF and World Bank in developing countries, who she has read extensively. “His whole point of view, that you do need regulation when markets fail, I kind of subscribe to that,” she says. “In developing country context, its very important to do that.”

Since taking the chair, Dr Akhtar has began a root-and-branch overhaul of the bank, to modernize it, strengthen it and manoeuvre it into a position that best serves national need. She has brought particular focus to restive areas in the lawless North-West and Baluchistan, where separatists have made advances and where Islamabad’s writ is weak. She sees a clear link between extremism and limited economic activity. “Our data shows this,” she says. “I have read the warning signals, I have told the president one of my important tasks is to promote credit flows to underserved areas and vulnerable populations. It has been my big mission.”

Another mission has been to strengthen monetary policy. Money supply, M2, had exploded during the early Musharraf years, from 1999-2004, when there was very easy terms, with M2 expanding “significantly” above the nominal GDP growth rate, and without much control, she says. That was fine while there was low inflation but in 2005, the system caught up. Inflation jumped to 11.3 per cent, suddenly there was a need to be pro-active on monetary policy. “The biggest challenge was what to do with monetary policy because it wasn’t effectively being managed prior to that. One of my biggest challenges I did face is to make sure to keep money supply under control, to manage it effectively, which I did. Its now rule-based rather than on an auto-system. That’s a big change internally, a big agenda item for me. While I am exploring possibilities of moving Pakistan’s monetary policy eventually to inflation targeting, but is it ready, can we do it right away..no, there is a lot of fundamental work to bring our maturity to that level.”

Another pressure point is to maintain capacity at the SBP “for the markets to work.” Pakistan has experienced a huge explosion in the private financial sector in recent years. The SBP is well-known in Pakistani banking as a solid training ground but well-trained staff from the SBP have been lost to the higher private salaries, at a time when there are more strains on the SBP, particularly in regulation as the sector it monitors booms. “I feel we need to take a major leap forward here,” she says. “There’s a whole human resource strategy change which the central bank needs and I am in the midst of launching this. We have diagnosed the problem, identified where we have deficits.” She insists the bank makes its own calls on policy. She consults allcomers, including Prime Minister Aziz, also Finance Minister, but insists she exercises “full 100% independence in decision-making. “Its good to consult but I maintain my own decisions.”

Beyond Pakistan, and though its early days in her governorship, she has been arguing for a greater say by developing countries in the architecture of the very multilateral agencies where she has had much of her career. She put Pakistan in a lobby at the recent IMF and World Bank annual meetings in Singapore arguing for voting and quota reform. That she’s a woman, a Muslim and from a crucial developing country that frequently finds itself as at the centre of world events makes her present as an attractive advocate. But a fatalistic one, too. Asked if she can see a day when the key agencies might be headed by someone who isn’t from the US or Europe, she says “not in my lifetime.”

Developing countries, she says, are still the most vulnerable to sharp systemic shocks. Despite the carnage of the 1990’s, she says the world still hasn’t learnt its lessons to mitigate against future crises. “We haven’t really been able to fully institute risk management,” she says. “We have read more, we know more but will we be able to cover, 100 per cent, operational risk, never.” Despite her background in crisis management in Asia, she says Pakistan “doesn’t need rescuing.”

“There’s no message there, that’s not why I was appointed,” she says. “Good foundations have been laid, we have made phenomenal inroads for sector reform, to strengthen its independence, its institutions. I’m part of the continuum and that’s what I will leave behind to my successor.”